Ethereum Needs ‘refined Messaging’ to Entice Wall ST — Attestant Execs

The United States Securities and Exchange Commission has seemingly “dug in” on its stance on a rule that would curtail crypto custody services for regulated financial firms.

In a Sept. 9 address to a banking conference, SEC chief accountant Paul Munter discussed the agency’s regulatory stance on accounting for crypto assets, focusing on SEC Staff Accounting Bulletin No. 121 (SAB 121) and its applications.

“The [SEC] staff’s views in SAB 121 remain unchanged,” he said. 

“Absent particular mitigating facts and circumstances, the staff believes an entity should record a liability on its balance sheet to reflect its obligation to safeguard crypto-assets held for others,” Munter added.

ETF Store President Nate Geraci said in a Sept. 10 X post that the SEC “appears dug in” on SAB 121.

“They simply don’t want to provide regulated financial institutions with the ability to custody crypto,” he added.

The SEC introduced SAB 121 in March 2022, outlining its accounting guidelines for institutions looking to custody crypto assets.

The rule was divisive in political circles as it virtually prevented banks and regulated financial institutions from custodying crypto assets on behalf of clients.

The SEC believes that entities with such safeguarding arrangements should record a liability on their balance sheets for digital assets.

Munter said the SEC had reviewed various accounting scenarios involving blockchain and crypto assets and acknowledged that not all arrangements fit the proposed guidelines set out in SAB 121. 

Bank holding companies that safeguard crypto with bankruptcy protection may not need to record a liability on their balance sheets, he said. 

Additionally, “broker-dealers” that facilitate crypto transactions but do control the cryptographic keys may also not be required to record liabilities. 

Meanwhile, SEC Commissioner Hester Peirce, who has been vocally against the rule, said on X she continued “to be concerned about the SAB 121 substance and process.” 

The US House of Representatives voted to overturn controversial SEC guidance in May. However, President Biden vetoed the repeal the following month. 

Source: COINTELEGRAPH

Strategies for Stability: Protecting Your Portfolio in Uncertain Times

Diversified ETFs:

iShares MSCI USA Min Vol Factor ETF (USMV).

iShares MSCI Global Min Vol Factor ETF (ACWV).

iShares U.S. Utilities ETF (IDU). 

Vanguard Consumer Staples ETF (VDC).

Bonds:

Hedging with Options:

Gold and Precious Metals:

Currency Hedging:

Intel is one of the most famous semiconductor chip producers. Founded in 1968, it was the legendary chip foundry that had its “Intel Inside” almost every personal computer and server in the 1980s and 1990s. But its success in that sector missed the rise of DRAM (dynamic random access memory) and NAND (NOT-AND logic circuit) flash memory chips, today dominated by South Korean chipmakers; GPU (graphics processing unit) chips led by Nvidia; and ARM (Advanced RISC Machine) reduced instruction set computer architecture chips used widely in mobile phones.

In other words, while Intel reaped the benefits of dominating general purpose chips, it missed the rise of specialised chips used in gaming machines, mobile phones (such as the M1 chip used by Apple) and crypto-asset mining computing equipment, as well as the artificial intelligence (AI) chips used in big data processing centres. Its asset-heavy vertically integrated foundry fab model has been challenged by asset-light but design-intensive (fabless) chip companies such as Qualcomm, AMD and Nvidia, which rely on specialist makers such as Taiwan Semiconductor Manufacturing Co (TSMC) to do high-quality fabrication.

Intel’s legendary co-founder Gordon Moore coined Moore’s Law, which predicted that the number of transistors in integrated circuits (ICs) would double every two years, generating speed, scale and scope in computer processing capacity. Meanwhile, co-founder Andy Grove was the ruthlessly focused engineer and corporate captain who drove research and development (R&D), production efficiency and product branding, particularly the famous 86-series chip.

Intel was the darling of the tech market in the run-up to the Nasdaq boom of 2000. Thereafter, the company was led by marketing and financial engineers who slowly lost focus on how to evolve chip design and production in a situation where the design and manufacturing of smaller, faster and energy-efficient chips were costing more and more. Consulting firm McKinsey estimated that the design cost of bringing a 65nm (nanometer) chip to production in 2006 was US$28 million, whereas this rose to US$540 million for a 3nm chip by 2020. The cost of each advanced ASML lithography machine essential to producing such advanced chips is now more than US$378 million (RM1.6 billion) each. The financial cost of capital and capacity expansion rise with each new generation of chips, making it tough not to keep investing for the long term, but companies must do so at the right cycle.

Intel became the top chipmaker because for half a century, US companies like Intel, Motorola and Texas Instruments (TI) were vertically integrated as they designed, manufactured and marketed their own chips. In the 1980s, Motorola and TI were much bigger than Intel, but they were more conservative in R&D.

As the cost of R&D rose, from 2019 to 2023, Intel spent US$101 billion on increasing plant and equipment (P&E) capacity and US$75 billion on R&D. But it also lavished shareholders with US$30 billion in stock buybacks and US$25 billion in cash dividends, which together absorbed 79% of its net income. Intel’s distribution to shareholders has been far greater than that of TSMC and Samsung, which distributed 67% and 38% respectively over the same period.

Despite the vast sums that Intel had aggressively indulged on its shareholders, it consistently allocated 30% of its revenue to P&E and 22% to R&D. The other major global integrated device manufacturer (IDM), Samsung, had a big gap of 13% between P&E and R&D compared to Intel. In contrast, TSMC, which is a pure foundry that manufactures to client needs (such as Apple), has allocated a significant 45% of its revenue to capital expenditure while its spending on R&D remains low at 8%. In other words, TSMC lets its clients focus on R&D while it focuses on production excellence. But being involved in different chip sectors, the broad skills and knowledge intensity of its engineers are impressive.

During the pandemic, even though Intel made huge allocations to catch up with its competitors, its financial performance began to weaken when its net income declined more than 50% after 2021. To maintain its share price, the company generously provided a dividend payout to shareholders averaging 129% of net income between 2022 and 2023. At the same time, Intel increased borrowing, bringing its total debt to around US$45 billion. For a financial analyst, this looked more like financial engineering to produce profits through leverage, rather than paying attention to real excellence and cutting edge engineering.

Despite getting more than US$8 billion from the US government under the CHIPS Act to help onshore chip manufacturing return to the US, Intel is beginning to experience both financial and operational headwinds.

On Aug 1, the company announced 15,000 job cuts and suspended dividends. The market reacted harshly after it released its 2Q2024 earnings report, resulting in around US$30 billion being wiped off its market cap. Market rumours swirled after Lip Bu Tan — a former CEO of Cadence Design Systems, which produces cutting-edge software tools to design advanced chips — resigned from Intel’s board, with unconfirmed disagreements on the company’s strategic direction.

Intel’s 2Q2024 earnings report showed that operating losses had increased by US$948 million compared to last year. Key factors contributing to the huge losses included the higher cost of producing smaller processors such as Meteor Lake, and increased construction charges on new AI fabs in the US and supporting facilities around the world. Our calculations of economic-value-added based on Intel’s financial accounts suggest that value-added declined to negative-value-added of US$11.5 billion from the previous year.

Intel has shown the classic strategic choice for market leaders, which is to keep milking profits from legacy winners but lose focus on keeping the R&D edge over strong competitors like AMD, Nvidia and Qualcomm, which offer comparable AI chips with better performance or price. If you do not cut out the fat earlier with short-term impact on quarterly profits, the market will punish you when you take belated action. TSMC today has eight times the market cap of Intel.

Beleaguered CEO Pat Gelsinger has called in Wall Street advisers like Goldman Sachs and Morgan Stanley to advise Intel on how to move forward. Can financial engineers fix real engineering strategic issues, other than to temporarily calm impatient investors? There are options such as spinning off subsidiaries like Altera or splitting the company into different listed companies. The risk is that Intel, which has a total market cap of less than one-tenth of that of any of the Magnificent Seven tech giants, will be bought up as their manufacturing arm.

As Grove used to say, only the paranoid survive. The question is whether the present Intel leadership is paranoid enough to survive that cruellest of market tests.

Source: Theedgemarkets

Apple Inc lost its court fight over a €13 billion (RM62.44 billion) Irish tax bill, in a boost to the European Union’s crackdown on special deals doled out by nations to big companies.

The EU’s Court of Justice in Luxembourg backed a landmark 2016 decision that Ireland broke state aid law by giving the iPhone maker an unfair advantage.

The European Court of Justice ruled on last Tuesday that a lower court win for Apple should be overturned because judges incorrectly decided that the commission’s regulators had made mistakes in their assessment.

The ruling is a boost for EU antitrust chief Margrethe Vestager, whose mandate in Brussels is about to end after two terms. 

In 2016, Vestager sparked outrage across the Atlantic when she homed in on Apple’s tax arrangements. She claimed that Ireland granted illegal benefits to the Cupertino, California-based company enabled it to pay substantially less tax than other businesses in the country over many years. 

She ordered Ireland to claw back the €13 billion sum, which amounts to about two quarters of Mac sales globally. The money has been sitting in an escrow account pending a final ruling.

CEO Tim Cook blasted the EU move as “total political crap”. The US Treasury weighed in too, saying the EU was making itself a “supra-national tax authority” that could threaten global tax reform efforts. Then-president Donald Trump said Vestager “hates the United States” because “she’s suing all our companies”.

“We are disappointed with decision as previously the general court reviewed the facts and categorically annulled this case,” an Apple spokesperson said.

Source: Theedgemarkets

Demand fears weigh on oil

Oil prices saw a fair amount of volatility in August. In fact, implied volatility in ICE Brent hit a year-to-date high during the month. Several supply risks have arisen, providing a short-term boost to prices. However, this has been short-lived, with demand concerns continuing to weigh on sentiment.

Demand concerns are centred around China, where cumulative imports over the first seven months of the year are down 2.1% year-on-year, while apparent domestic consumption has fallen year-on-year for the last four months. Given that China is expected to make up a significant portion of global oil demand growth, weaker domestic demand has had an impact on oil prices. However, global oil demand is still expected to grow in the region of 1m b/d in 2024 and by a similar amount in 2025.

A key uncertainty for the market is OPEC+ policy. OPEC+ members are scheduled to start unwinding their additional voluntary cuts from October 2024 until the end of September 2025. The process should see the group bringing more than 2m b/d of oil back onto the market. However, the group stated from the beginning that plans to bring this supply back can be paused or reversed depending on market conditions. Demand concerns and the fact that Brent is trading below US$80/bbl could delay plans to increase supply. However, much will also depend on how the situation in Libya evolves. A dispute between the Western and Eastern governments in Libya has seen the eastern government shutting down oil fields, putting 1.2m b/d of oil supply at risk. If this dispute lingers, it could provide OPEC+ members the opportunity to increase their supply without actually seeing a net increase in global oil supply.

Weaker Chinese demand has led us to revise our Brent forecast lower for the remainder of the year. We now expect ICE Brent to average US$80/bbl in the fourth quarter of this year, down from our previous forecast of $84/bbl. In addition, our balance is showing a slightly larger surplus in 2025, which has led us to cut our 2025 Brent forecast from an average of $79/bbl to $77/bbl. Our balance sheet assumes that OPEC+ will stick to its plan to unwind additional voluntary supply cuts.

Global oil market to return to surplus in 2025 (m b/d)

Source: ING Research, IEA, EIA, OPEC

Supply risks propping up European natural gas

The European natural gas market was well supported in August. TTF traded above €40/MWh on several occasions during the month. The strength in the market is due to increased speculative activity caused by growing supply risks, rather than fundamentals becoming increasingly bullish. Speculators built their net long in TTF to a record high in August.

There are several supply risks facing the market. This includes concern that remaining Russian pipeline flows via Ukraine could be disrupted due to recent developments between the two countries. Ukrainian attacks in the Kursk region of Russia, specifically near the Sudzha entry point, where Russian pipeline gas enters Ukraine before making its way to the EU, threaten around 40mcm/day of supply to Europe, equivalent to almost 15bcm of natural gas annually. However, for now, these flows remain uninterrupted.

Russian pipeline gas via Ukraine is still set to stop at the end of this year. Ukraine has made it very clear that it has no intention to extend the transit deal with Russia, which expires on 31 December 2024. The EU and Ukraine are looking at alternatives, including a possible gas swap with Azerbaijan. No renewal in the transit deal should be largely priced into the market, given that Ukraine has made its position clear over the past year. However, there is still the potential for a knee-jerk reaction in prices, particularly if the 2024/25 winter is colder than usual.

The market is also nervous about ongoing maintenance in Norway. This maintenance has led to a drastic reduction in Norwegian gas flows to Europe. While this maintenance is scheduled, and not a surprise to the market, there is concern over the potential for an overrun in work, which could leave the market tighter than expected going into the next heating season.

Supply risks and healthy speculative appetite in the gas market have forced us to revise our forecasts for the remainder of 2024. We expect TTF to average €37/MWh in the fourth quarter of 2024, up from €35/MWh previously. Although, this suggests that we still see prices trading down from current levels. Storage is more than 92% full and hit the European Commission’s target two months early. We expect storage will be close to 100% full by the start of the 2024/25 heating season.

In addition, further LNG capacity is expected to ramp up later this year and in 2025, leaving the global LNG market more comfortable next year. As a result, we continue to expect TTF to average €29/MWh in 2025.

Private equity investments in the Middle East and North Africa reached $5.9 billion across 49 deals in the first half of 2024, despite challenging market conditions, according to a new report. 

The figures reflect a slowdown in deal activity compared to 2023, when $15.4 billion was deployed across 159 deals for the entire year, raising concerns about whether activity will rebound in the second half of 2024, according to the latest report by PitchBook. 

Private equity refers to investment funds that acquire ownership in mature companies, typically through buyouts, aiming to improve performance, restructure operations, or expand before eventually selling for profit. 

The data highlights the impact of what it describes as the “worst market conditions in the past two years” on private equity dealmaking in the region. 

In comparison with the last decade, where deal values surpassed $10 billion in five out of 10 years, the first half of 2024 represents a significant drop.

Historically, MENA private equity activity has often been driven by a few large, multibillion-dollar deals, and a similar pattern would be required in the second half of the year to match 2023’s performance. 

The report revealed that Saudi Arabia’s Public Investment Fund was the most active investor since 2018, reportedly investing in 36 deals. 

The Emirate’s Abu Dhabi Developmental Holding Co., also known as ADQ, came in second with 20 deals, followed by Jordan’s Al Arabi Investment Group with 19 transactions. 

Market conditions this year have been heavily impacted by a combination of geopolitical conflicts, fluctuating oil prices, and the threat of trade sanctions. 

The ongoing conflict between Israel and Gaza has not only caused immense humanitarian suffering but has also destabilized economies across the region. 

“The risk of escalation or a lengthy conflict creates difficult circumstances for economies. Alongside the humanitarian impacts, conflicts lead to substantial economic losses with potential spillovers to neighboring countries,” the report stated. 

Compounding these challenges are disruptions in trade and oil production. Earlier this year, attacks on ships in the Red Sea prompted shifts in trade routes and contributed to a reduction in oil output, amplifying volatility in oil prices — a key factor for MENA economies

As energy exports represent a significant portion of revenue for many countries in the region, any reduction in oil production heightens fiscal pressures and affects broader economic stability, the report explained. 

These market headwinds are making it increasingly difficult for private equity investments to gain traction, as businesses navigate both operational risks and broader economic uncertainty. 

PE digest 

A significant private equity deal in the first half of 2024 was CVC Capital Partners’ $3.3 billion sale of GEMS Education to Brookfield. 

GEMS Education, a Dubai-based private school provider with over 60 years of operation, is expected to welcome more than 140,000 students across 46 schools in the UAE and Qatar by September. 

“Education has been a key consideration in MENA, and attempts to improve it have been a priority. Initiatives including strengthening education funds, revamping programs, focusing on STEM (science, technology, engineering, and mathematics) skills, and the implementation of virtual education due to the COVID-19 pandemic have been part of the plans,” the report said. 

The healthcare sector in the MENA region is poised for significant growth in the coming years, driven by increasing demand and substantial investments. 

A major deal this year was Gulf Islamic Investments’ $164.6 million investment in Saudi-based health care provider Abeer Group.

As part of its Vision 2030, the Kingdom plans to invest over $65 billion in healthcare infrastructure, with projects including 20,000 new hospital beds and 224 health care centers valued at $12.8 billion. 

The UAE is also advancing healthcare development, with approximately 700 projects worth a combined $60.9 billion, largely driven by the private sector. Public-private partnerships are expected to play a key role in the sector’s growth. 

Qatar has introduced a PPP law to encourage international investment, while Oman has initiated its first medical city through the same arrangement. 

Additionally, mandatory health insurance policies are becoming increasingly common across the Gulf Cooperation Council, leading to higher patient numbers. 

“Strong demand for healthcare fueled by increasing and aging populations in the MENA region is anticipated to drive up government and private investor spending in the sector. A large pipeline of projects as well as new technologies will create opportunities for startups, portfolio companies, and investors,” the report added. 

MENA exits 

Private equity and venture capital-backed exit activity saw a sharp decline in the first half of 2024, with only $1.6 billion generated from 25 exits. 

This marks a significant drop compared to the previous four years, where annual exit values consistently surpassed $10 billion. 

The report stated that the current figures underscore a notable slowdown in exit activity within the MENA region, reflecting broader global trends in 2024. 

Investors and management teams have been hesitant to pursue exits amid market volatility, influenced by fluctuations in public markets, inflationary pressures, and rising interest rates, which have dampened growth prospects. 

With interest rate hikes largely on pause and potential rate cuts expected in Europe and the US later this year, there is cautious optimism for a recovery in the second half of the year. 

The easing of monetary policy could help stabilize market conditions and create more favorable opportunities for exits. 

VC’s role in PE 

The MENA venture capital ecosystem experienced weaker capital deployment in the first half of the year, mirroring global trends. 

A total of $1.3 billion was invested across 321 VC rounds, putting the region on track to fall short of 2023 levels by year-end.

 This follows a decline in 2023, when activity in the sector dropped from a peak of $5.5 billion across 894 deals in 2022. 

“The MENA region has been earmarked for high growth and untapped opportunities, but it has not been insulated from the broader slump in activity felt by more mature ecosystems,” the report said. 

Sluggish economic growth, geopolitical tensions, and inflationary pressures have dampened market confidence, contributing to the overall slowdown in VC activity.

Source: ARAB