Happy Monday!

📝 Focus

• Arms and the Son

📊 In the Markets

• Action Jackson, Poor Top-10%-ers

• China’s Damp Squib Games

• Wild Markets: ARS and BTC

📖 MoneyFitt Explains

🎓 The IMF

📝 Focus

Arms and the Son

SoftBank has reportedly acquired the 25% stake in Arm Ltd that it doesn't already own from its Vision Fund unit in a deal valuing the chip designer at $64bn. This is suspiciously close to exactly double the $32bn that SoftBank's mercurial billionaire founder Masayoshi Son paid for it in 2016, implying compound appreciation of about 10.5% a year. This is almost exactly what the S&P 500 has produced but streets ahead of the FTSE-100 -- where Arm had been the 12th-largest constituent -- which gained next to nothing over the same period. (The Son-controlled Vision Fund bought the stake at the same valuation a year later, so its CAGR will be higher.) One barely-arms-length transaction of whatever size is not, of course, a reliable guide to market or IPO valuations.

..... ▷ Details will be disclosed on Monday when Arm files for its Nasdaq launch. The move eliminates an "overhang" for Arm's stock after the IPO, as the Vision Fund had planned to sell its stake over time following the listing, while SoftBank has indicated that it will remain a long-term strategic investor. This acquisition is also seen as a victory for the Vision Fund's major investors, including Saudi Arabia's Public Investment Fund and Abu Dhabi's Mubadala, and may boost their direct support for the IPO. Arm is, a bit unhelpfully, also expected to report a revenue decline of about 1% in the year ended March in the IPO filing, according to Bloomberg, on shrinking demand in all the major markets for chips other than AI (i.e. smartphones, PCs and data centres). Sales for the quarter ended June 30 fell 2.5% to $675mn.

..... ▷ Despite the valuation at $64bn for SoftBank's purchase, Arm still faces challenges in securing a premium valuation, hence Son's personal drive to lock in as anchor investors prominent semiconductor users such as Amazon and Apple in addition to chipmaking customers like Intel and Nvidia. In 2022, Nvidia was blocked by antitrust regulators from buying Arm at a $40bn valuation in cash and shares in what would have been the largest chipmaker deal in history. Nvidia CEO Jensen Huang said at the time, "our combination will create a company fabulously positioned for the age of AI."

..... ▷ Besides Nvidia's valuation of the firm barely 18 months ago at over a third lower, Arm's also facing a maturing smartphone market and, frankly, slightly peripheral involvement in AI (i.e. used in CPUs, not GPUs), whatever Mr. Huang said. And competition is building, with RISC-V, an open-source architecture alternative to Arm’s designs being developed in China (with the first RISC-V laptop recently delivered), and Apple creating their own chip cores and only paying Arm for a much cheaper “architectural”, licence.

- Cover image: An ARM processor in a Hewlett-Packard PSC-1315 printer, produced for HP by STMicroelectronics. By Socram8888 - Own work, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=4633385 

Irish playwright George Bernard Shaw’s "Arms and the Man" (1894) is a popular comedy satirising romantic ideas concerning war and heroism. The play is set against the backdrop of the Serbo-Bulgarian war and features a mercenary, a naive idealist and her rather stupid fiancé. There’s an analogy somewhere between that play and a) private equity bosses, b) stock market listings or c) artificial intelligence chipmakers to support today’s rather laboured Focus article title. Answers on a postcard.

📊 In the Markets

Action Jackson: Wall Street stocks closed about flat, while US Treasury yields pulled back a touch after the recent surge that took 10 years to a 16-year high of 4.328%. (If it breaks above 4.328%, that would take it to the highest since 2007.) Attention is now turning away from the Minutes of the Fed's last meeting, where 99.99% of US traders have been focusing on the "hawkish" rate-hiking bits, to the world's central bankers' annual gathering in Jackson Hole, where the Fed chairman's Friday speech is keenly awaited.

The US Dollar made its 5th straight week of gains against its trading peers, as measured by the horribly flawed US Dollar Index (DXY), which leaves out the currencies of two of the US's three largest trading partners, China and Mexico but includes Sweden and Switzerland. Oil prices rose for the day, with global benchmark Brent crude up 0.8% but closed down for the week, snapping a seven-week winning streak on the increasingly cloudy outlook for China's growth and its demand for energy. A Bloomberg survey showed a quarter of the US’s top-10% earners felt poor, and 60% of them worried about money. Global shares marked their biggest weekly drop since March but are overall still around two-month lows, with Silver Fox Jay Powell sharing centre stage with worries over China (see below), which is sending HK's Hang Seng Index spiralling. The HSI is 21% down from its January highs but still 21% above its October lows... and on Friday dumped struggling property developer Country Garden from its constituents.

..... ▷ China support? Also on Friday, with China's stock markets plumbing 9-month lows, its securities regulator, the China Securities Regulatory Commission (CSRC), revealed a raft of support measures, including reducing trading costs, promoting share buybacks and encouraging long-term investment. The CSRC is also considering extending trading hours and plans to boost the development of the equity fund industry, e.g. speedier index fund registrations, accessing derivatives and (shock) encouraging fund managers to make countercyclical investments. Good luck with that last one. Earlier in the day, the People’s Bank of China, the central bank, defended the currency to try and stop the slide, which had intensified with the rate cut earlier in the week. On Sunday, the PBOC urged banks to lend more to companies and on Monday, at a monthly meeting, it is expected to announce cuts to borrowing costs for businesses and households, which would probably only really be strongly positive if large (i.e. more than 0.15%). What investors have been waiting for is for Beijing to act on the promises of monetary, regulatory and fiscal stimulus made less than a month ago, which already seem a distant memory. (Excellent exit opportunity at the time for the fleet of foot, though.)

..... ▷ Meanwhile, in Wild Markets News (1): Surprise front runner in Argentina's presidential elections, far-right economist and outspoken TV personality Javier “El Loco” Milei surprisingly met with The IMF🎓 to discuss models for the dollarisation of the economy should he win, and promising that the country would not default on its foreign debt for the tenth time. To the IMF, Argentina is proof positive that they need to exist. But it’s also “Argentina again?” and is by far its biggest debtor. As they say, when you owe the bank $10 million, you're in trouble.... when you owe the bank $44 billion, the bank is in trouble. And in Wild Markets News (2): bitcoin dropped 7.2% for its biggest 1-day drop since last November's FTX collapse to hit a 2-month low, reflecting global risk aversion across asset classes (positive read: bitcoin is actually considered an asset class vs negative read: what uncorrelated asset?)