WSJ : Crypto Crash Stalls WeWork Founder Adam Neumann’s Climate Venture

Crypto Crash Stalls WeWork Founder Adam Neumann’s Climate Venture
Investors rushed to startups offering cryptocurrencies backed by carbon-offset credits, then the markets tanked

Former WeWork WE 6.45% Chief Executive Adam Neumann resurfaced with a new company earlier this year, in a buzzy, young industry that aims to use cryptocurrencies to fight climate change.

Months later, that company, Flowcarbon, as well as a host of similar startups, have slowed operations and product rollouts—the latest fallout of tanking markets.

Flowcarbon, one of a group of companies that are issuing cryptocurrencies backed by carbon credits, has decided to “wait for markets to stabilize” before launching its products, said Chief Executive and co-founder Dana Gibber. Other outfits such as Toucan Protocol Association and KlimaDAO have effectively frozen new business as a plunge in crypto coincided with a crackdown on issuance of new cryptocurrency tokens by a big carbon-market registry.

Flowcarbon and its peers are combining cryptocurrency, a type of digital asset that trades on decentralized computer networks, with another largely unregulated and volatile financial instrument: carbon credits.

Such credits are issued by projects that aim to remove carbon-dioxide from the atmosphere or prevent emissions from being produced, through forest planting or conservation, for instance. Each credit represents one metric ton of carbon dioxide removed or avoided. Corporations or individuals buy the credits and retire them to offset their greenhouse-gas emissions, as investors and others demand action to combat climate change.

Most carbon credits are sold through brokers or directly by project developers, a process critics say is clunky, opaque and time-consuming. Flowcarbon and its peers say they can change that by bringing credits onto their networks as crypto tokens—Flowcarbon’s is called the Goddess Nature Token—where they can be traded in large volumes like digital money and destroyed, or “burned,” when the owner wants to offset emissions.

“As someone who bought credits from brokers in the past, buying and burning tokens is far, far easier,” Mark Cuban, a tech billionaire and crypto investor, said in a written response to questions. Mr. Cuban has used Klima tokens to offset 1,100 metric tons of personal and business carbon emissions, according to KlimaDAO data.

Venture capitalists invested around $267 million into climate or carbon-related crypto deals in 2021 and another $156 million this year through early July—a surge in investment from previous years although a fraction of the billions invested in cryptocurrency deals overall, according to research firm Pitchbook Data Inc.

A good chunk of that funding has gone to Flowcarbon, which was co-founded by Mr. Neumann—best known as the ousted head of office-rental firm WeWork. WeWork’s spectacular crash, shelved public offering and bailout in 2019 became the subject of an Apple TV+ drama starring Jared Leto and Anne Hathaway. Flowcarbon says Mr. Neumann isn’t involved in the daily operations of the company.

Mr. Neumann has invested in a number of startups as well as real estate, the Journal has reported. He didn’t respond to a request for comment.

The fledgling industry took off after Toucan and KlimaDAO started selling their tokens in October, driving an influx of money to the carbon markets. At its peak in late October, the value of all Klima tokens in circulation topped $1 billion.

For the six months through March, more than 23 million carbon credits were moved onto crypto networks. That accounted for about 28% of credits removed from the registries where they were listed during that period, according to an analysis by data provider Trove Research Ltd. So far, less than 2% of those credits have been used to offset carbon emissions and the bulk have been traded, according to KlimaDAO data.

During the last three months of 2021, hundreds of millions of metric tons of carbon have been traded through crypto tokens, with a value topping $3 billion, according to KlimaDAO data. That is a similar volume to the carbon-trading activity for all of last year outside of the crypto markets, according to carbon-markets data tracker Ecosystem Marketplace.

Many carbon-market watchers still aren’t sure how helpful carbon-backed tokens will be, or whether they are good for the overall carbon-offset market, given the speculation that has often accompanied cryptocurrencies.

The purpose of carbon credits is offsetting emissions, said Guy Turner, Trove Research’s CEO. “If people are now buying those tokens because they see it’s a money-making machine…I think that’s potentially unhealthy,” he said.

Some see snapping up the credits for investment as healthy. “In order for carbon credits to have a significant impact on the climate crisis, the market for them must scale up by orders of magnitude,” said a group that says it represents KlimaDAO’s core project team and that maintains anonymity of its members. “Speculation plays a critical role in scaling any market” by bringing in enough money to promote easy, liquid trading and accurate prices, they said.

“We think it is OK if people can make money either as an investment or a hedge against higher carbon costs,” Toucan Chairman Julian Sommer said. “But it should not be the only use case.”

In May, Flowcarbon announced it had raised $70 million from presales of its token, as well as money from funds run by big-name venture investors such as Andreessen Horowitz and General Catalyst, among others.

By that time, however, cryptocurrencies were in free fall, having lost $1 trillion in value since November.

Meanwhile, also in May, the biggest carbon-offset registry halted the use of its credits to back new cryptocurrency tokens, saying it was concerned that the current method of creating those tokens was causing confusion in the carbon markets. The registry, Verra, said it is studying new methods of creating the tokens.

Flowcarbon had expected to launch its token by the end of June, but put that plan on hold indefinitely, said Ms. Gibber. In recent weeks, the company has been announcing partnerships to help it offer services like calculation of carbon footprints for credit buyers and loans for credit-issuing projects.

“We invest with a long-term view and remain very confident about the market,” said Arianna Simpson, a general partner at Andreessen Horowitz handling the Flowcarbon investment. General Catalyst declined to comment.

Toucan, Klima and other crypto-carbon startups say they are waiting for Verra to propose a new method of bringing credits onto cryptocurrency networks and hunkering down until the crash in crypto markets eases.

“When everything is up and everyone is having a party, everyone says, ‘Oh, of course we’re going to put money behind carbon,’” said Toucan’s Mr. Sommer. “Now everyone needs to survive.”

WSJ : SIM Cards Are Going Away. Why That’s a Good Thing

SIM Cards Are Going Away. Why That’s a Good Thing
Already popular in Europe and Asia, eSIMs let you connect to a wireless network without a physical card

Since the dawn of the smartphone age, changing your cellular provider followed the same pattern: You’d get a SIM card from your new carrier, find something small enough to poke the tiny hole on the side of your phone, remove your old chip and replace it with the new one.

That process will soon be a thing of the past. Millions of people have moved away from physical SIM cards to virtual ones. One day, the rest of us will do the same.

SIM cards are being replaced by their “embedded” counterparts known as eSIMs. Rather than getting a physical card from a carrier, you’ll instead activate service digitally by logging into an app or by scanning a QR code.

The software connects you to a new cellular network on the fly, letting you quickly sign up for service without tracking down a store. Because phone makers don’t have to include space for the SIM card tray, they can build sleeker devices, say industry veterans. ESIMs even let you have two phone numbers on your phone at the same time: You could have one for work and one for personal calls, or set up an international number alongside your normal service when traveling.

“The vision is, you can get a phone from anyone, and as you’re activating the device, you pick your service operator and off you go,” said Chetan Sharma, a wireless industry analyst who leads his own consulting firm.

ESIMs have become popular in Europe and Asia, where consumers tend to switch between prepaid plans to get the best data package available, he said. In the U.S., people typically stick with one carrier.

The three biggest U.S. wireless providers— T-Mobile, AT&T and Verizon —say a cardless future is approaching here, too. With last year’s iPhone 13, Apple stopped including physical SIM cards in the box. And Motorola’s foldable Razr phone from 2019 didn’t support physical SIMs at all.

“It’s a natural evolution,” said Jeff Howard, vice president of mobile devices and accessories at AT&T. “It’s going to make the experience better down the road.”

Right now, setting up an eSIM isn’t always painless. Even if your phone supports it, your carrier may not. And if you try to move eSIMs between devices, you likely have to go through setup all over again.

A Slow Start
SIM cards relay your user details to the carrier to authenticate your smartphone and enable you to make and receive calls, texts and data.

But when you want to change phones or switch service providers, SIMs can be cumbersome. Anyone who’s hunted for a tool to open the SIM tray (a skinny paper clip, for instance) knows what a pain that can be. Once you actually get the card out, the tiny dimensions of today’s popular nano-SIMs—about the width of an M&M but thinner than a credit card—make them easy to lose. SIM cards also are vulnerable to hacks and have been tracked and exploited by cybercriminals.

ESIMs aim to solve those issues. While they still require a chip inside the phone, that component is smaller than physical SIMs and can’t be removed. No more worries about dropping your eSIM and losing it in your floor crack.

The digital chips allow carriers or device makers to quickly roll out software updates if security vulnerabilities are identified, said Anthony Goonetilleke, group president of technology and head of strategy at Amdocs, an eSIM software company.

“You can suddenly send out a security update to millions of people globally if an issue is found,” Mr. Goonetilleke said. “You can’t do that with physical SIMs.”

Another plus: Activating service over the air makes it easier for customers to switch wireless providers. That’s a big reason why U.S. carriers were hesitant to adopt eSIMs, said Bernd Mueller, head of technology, solutions and strategy at the SIM-card production company Giesecke+Devrient.

Picking Up Speed
You may already have an eSIM-compatible phone and not realize it. Google’s smartphones have had eSIM capabilities since 2017’s Pixel 2, and Apple added it to iPhones starting with 2018’s iPhone XS. Roughly 40% of all phones Verizon carries this year have eSIM capabilities.

Because last year’s third-generation iPhone SE didn’t come with a physical SIM included, Verizon started training staff to onboard more eSIM customers, said Brian Higgins, Verizon senior vice president of device and consumer product marketing. Those customers can set up service through Verizon’s app, rather than getting a SIM in the mail or in a store.

AT&T added an activation guide on its website and will let customers scan a QR code to set up an eSIM on their device. During the setup process on T-Mobile’s network, the carrier prompts customers with compatible phones to activate their eSIM over Wi-Fi.

If you prefer to frequently switch between different phones, it may be simpler to pop your SIM card in and out of devices than to transfer your eSIM back and forth. And if you transfer your cellular plan from a physical SIM to an eSIM, your older card can be permanently disabled.

Physical SIMs won’t disappear immediately, but once Apple stops supporting them in its new iPhones, the writing is on the wall.

Phones with eSIM Capabilities
Here’s a list of phones that work with eSIMs. But check with your wireless provider, since not all carriers support the technology.

• iPhone 13 models: Can have up to two active SIMs—either two eSIMs, or one eSIM and one physical nano-SIM card

• iPhone XR, XS, 11, 12 models: Can have one eSIM and one nano-SIM

• Samsung Galaxy S20 and newer: Supports eSims. Can have two active SIMs, but check the specifics on your particular model

• Samsung Galaxy Z Flip, Fold and newer: Can have one eSIM and one nano-SIM

FT : EDF’s problems pile up as full nationalisation looms

EDF’s problems pile up as full nationalisation looms
French supplier of nuclear energy is struggling with plant shutdowns, build problems and skills shortages

At the site of France’s first new nuclear reactor in more than 20 years, robots are whirring away fixing faulty welding as developer EDF races to open the plant after a decade of delays that have damaged its reputation.

Ahead of it lies a challenge of a different order of magnitude: a construction programme to build six more, just as the French government, which owns 84 per cent of the business already, plans to take full control.

The full nationalisation of EDF, which was announced earlier this month, comes as a series of crises pile pressure on the group’s finances. In theory this will provide it with some relief away from the glare of public markets.

So far, however, the state buyout has raised more questions than it has answered, including how the government thinks it might do a better job at fixing long-running industrial problems that have plagued projects at EDF, some of them as basic as a lack of experienced welders.

“It’s not because the government will now have 100 per cent that it’s going to suddenly take three years less to build a reactor,” one person close to the company said.

“Right now we’re in symbolic territory with this nationalisation. It doesn’t resolve any of the main problems we know the group is facing — will it allow EDF to bolster the skills it needs?” said Cécile Maisonneuve, a senior adviser at the centre for energy and climate at French think thank IFRI. “None of the industrial or regulatory issues were linked to its capital structure.”

Just as Europe attempts to move away from its dependence on Russian gas and grapples with soaring power prices, problems at some of EDF’s existing 56 reactors in France have caused shutdowns and sent its energy output to multi-decade lows.


Instead, it has had to turn to expensive wholesale markets for supply and this is expected to all but wipe out its core profits this year. Rating agencies have warned that this will further push up EDF’s debts, beyond last year’s €43bn, and it is likely to need a second capital injection soon — after one as recently as April.

At the same time, political battles have made EDF’s listed status increasingly untenable. It was made to pay for an annual electricity price cap announced in January to shield consumers from the spiralling market, sparking a stand-off between the state and EDF managers, and enraging minority shareholders.

The Flamanville 3 reactor on France’s northern coast has come to symbolise some of the technical problems faced by EDF and its contractors. Now due to start loading fuel next year, construction began in 2007 with a target finish date of 2012. The budget is now nearly four times the initial €3.3bn estimate.

Setbacks include regulators finding faults in the finishing standards of some of the pipe welding. To address this, EDF commissioned purpose-built robots to work inside the pipes, rather than dismounting an entire piping system already encased in thick concrete walls.

Keeping EDF on track is vital for energy security not just in France but more broadly. Other European nations have long relied on its exported nuclear energy, and its dwindling output has come at the worst possible time as the bloc braces for a potential total cut-off of Russian gas.


French president Emmanuel Macron visits the GE Steam Power System main production site for its nuclear turbine systems in Belfort, France © Maxppp/PA Images
“France has traditionally been the source of cheap nuclear power for its neighbours but now it requires help and this will cause problems in Italy, Switzerland and Britain this winter,” said Phil Hewitt, director at energy consultancy EnAppSys.

The UK is also a major construction client. EDF is building its only new nuclear power plant — Hinkley Point C, a project that has been plagued by cost overruns and delays. All but one of Britain’s remaining nuclear power stations are due to close by the end of the decade.

But its home country is especially reliant. France lags European neighbours on wind and solar power, and is much more focused on nuclear as a source of low-carbon energy.

It accounts for more than 60 per cent of the country’s energy production and in February, the government announced plans for at least six next generation, EDF-made European Pressurised Reactors (EPRs) — a programme of some €50bn that will need to be financed with debt.

In private, French officials have criticised EDF and the way it has managed some operational problems, although the preventive checks and reactor shutdowns were demanded by the regulator.


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“EDF’s production cuts are not acceptable. It can’t go on like this,” one government official said, adding that full state ownership might help speed up decision making, including for new projects.

“lt allows us to gain time, a few weeks or months here and there. It adds up,” they said.

Some of EDF’s problems are not of its own making. Over the years, successive governments have pushed it into expensive strategic decisions, including the bailout of ailing reactor designer Areva.

It also suffered from a lull in government orders when the world cooled on nuclear power after the Fukushima disaster in 2011.

The energy crisis caused by Russia’s invasion of Ukraine has revived interest in the industry, but even in France, with its long history of construction and large fleet, it has been more than 20 years since the last new reactor came online — at the eastern Civaux site in 1999. Engineers and other skilled workers have deserted the sector to build careers in finance or other industries.


“In that gap between Civaux and Flamanville, we lost our knowledge of how to carry out huge projects and our industrial capacity,” said Alain Morvan, the latest manager brought in to finish the project, during a site visit in June.

With the EPR build in mind, EDF has now begun recruiting more nuclear specialists, and Morvan said there were lessons from Flamanville that could be applied elsewhere.

The company had also been pushing for a new regulatory framework for how nuclear power is sold, and for changes to a system that forces it to sell some of its output at fixed prices to local competitors, which outgoing CEO Jean-Bernard Lévy has called “poison” for the group’s finances.

The French government has yet to say how or when regulation will change and some reforms will require approval from Brussels.

It has also said little about how it might reshape the company — which also has a big renewable energy portfolio and a distribution business — when it takes full control, which is expected via a tender offer worth roughly €7bn in October or November.

EDF declined to comment further on the nationalisation or plans for the group.

Full state control will at least eradicate one very visible problem: since its shares peaked in 2007 after what was, at the time in 2005, one of Europe’s biggest ever IPOs, EDF’s stock has fallen close to 90 per cent.

One banker who has worked with EDF before said: “The original sin was privatising a group operating in nuclear energy to start with.”

In an internal memo to staff in July seen by the Financial Times, Lévy said facing up to future projects as a listed company had become too difficult.

“If the delisting does not solve all of our regulatory, industrial and financial problems, and particularly the scale of our debt, it does allow us to start finding solutions.”

FT : A German gas crisis will cause jitters across Europe

A German gas crisis will cause jitters across Europe
As Russia seeks to make others pay the price for its war in Ukraine, an EU-wide energy security strategy is needed

“We just don’t know. Everything is possible.” This was German economics minister Robert Habeck’s succinct response to the question currently consuming his country’s government, industry and public: when the 10-day scheduled maintenance to the Nord Stream 1 pipeline ends on July 21, will the Russian state-controlled gas exporter Gazprom resume deliveries? Or will Vladimir Putin perform a gasectomy on Germany?

A graph in the Federal Network Agency’s latest supply status report shows how much gas is currently flowing in at three connector points for Russian gas on Germany’s eastern border: none. “The situation,” says the agency, “is tense and a worsening of the situation cannot be ruled out.” 

That is a bit of an understatement. Nord Stream 1 supplies 58 per cent of Germany’s annual gas needs. The benchmark European TTF gas price has already risen by more than 130 per cent since the beginning of Russia’s invasion of Ukraine on February 24, to more than €170 per megawatt hour. In late June, after Russia reduced supplies by 60 per cent, Berlin triggered the second stage of its national gas emergency plan — one step away from gas rationing.

Germany also receives gas from Norway, the Netherlands and Belgium. But Russia could have redirected its gas via alternate routes such as Yamal or the Ukrainian transit pipeline, and it has not. So Germany is falling behind on filling up its gas storage facilities to create reserves for winter.

At the beginning of July, Germany’s three-decade-long trade surplus flipped into a deficit, driven by the rise in gas prices; the country’s wealth is created mostly by energy-intensive industries, whose import costs have soared. Inflation is at a record high, a recession looms and the euro is at parity with the dollar for the first time since 2002. Cheap Russian energy used to be a key source of the country’s global competitive advantage. Now Russia is making Europe and Germany pay the price for Putin’s war.

Germany’s options are few, imperfect and unpleasant. Habeck is bringing dirty coal plants back online, and telling people to take shorter showers. He is streamlining procurement and loosening environmental restrictions to build fixed liquefied natural gas terminals; meanwhile, he is renting floating terminals. And he has wooed authoritarian Gulf leaders in search of alternative LNG supplies. These are painful concessions for a Green politician. But Habeck is in a hurry, and has a strong pragmatic streak.

It gets worse. Germany’s energy emergency law privileges private households over industry — but some companies say that gas rationing or shutdowns could force them to shutter their operations permanently. The government has just passed a law that allows it to bail out firms hit by the energy shock; the gas importer Uniper has already raised its hand. Consumer gas prices might triple.

This dire prospect is causing the Liberals (who are in the government) and the opposition conservatives to loudly criticise Berlin’s decision to shutter Germany’s last three nuclear power plants by the end of the year.

Ironically, it was Angela Merkel’s conservative-liberal coalition that decided in 2011 to phase out nuclear power after the Fukushima power plant disaster in Japan. Since then, Germany has stopped investing in civilian nuclear power technology and expertise. The three plants are at the end of their safely viable lifetimes. They would cover only 6 per cent of the country’s electricity needs; and industry needs process heat, not electricity. In sum: the cost and risk of an extension outweigh the benefit.

Given how much of this pain is self-inflicted, the Schadenfreude in other parts of Europe was foreseeable. Being asked for solidarity by Germany after seeing it ignore criticism and steadfastly pursue its national economic interest for years may be a step too far for many.

Yet a gas crisis in the EU’s economic powerhouse will cause jitters across the continent. Uniper may be Germany’s biggest gas supplier; its main shareholder is the Finnish state-owned energy company Fortum. And Russia has fully or partially cut off gas supplies to almost a dozen EU countries. However, there is no European gas sharing arrangement, only a handful of hastily concluded bilateral “solidarity” agreements. Countries that receive large quantities of non-Russian gas — France, the Netherlands, Spain, Belgium — have not joined.

What is needed now is an EU-wide energy security strategy. Putin is using the threat of a gas cut-off to break Germany’s societal resilience and political will. But he means all of Europe.

 

FT : We should worry about price of food more than petrol, warns BlackRock’s Fin

We should worry about price of food more than petrol, warns BlackRock’s Fink
The destruction of arable land during the Ukraine war has dangerous global consequences

The dramatic spikes in oil and mineral prices after Russia’s invasion of Ukraine have distracted investors from the long-lasting and more dangerous impact of food inflation, BlackRock founder Larry Fink has warned.

“The one thing I worry about that we don’t talk enough about is food,” he told the Financial Times. “This isn’t just an inflation concern. There are also geopolitical concerns that result from this.”

The prices of energy, petrol and petroleum-based agricultural inputs shot up earlier this year when western nations imposed sanctions on Russia after the invasion. Grain and edible oil costs were also hit hard because Ukraine is a major exporter.

Oil has begun to drop back down this week to pre-invasion levels as traders brace for a sharp drop-off in consumption. But food price inflation remains stubbornly high. The US consumer price index figures for June show that the price of chicken parts and flour are each up close to 20 per cent year on year and margarine has jumped 34 per cent.

“We talk a lot about gasoline prices because that’s what affects Americans but the bigger issue is food,” Fink said. “There has been tremendous destruction of arable land in Ukraine.....Globally the cost of fertiliser is up almost 100 per cent and that additional cost is reducing the amount of fertiliser used in farming. That is harming the quality of the crop worldwide.”

Although lower oil prices have started to feed through to the price at the pump for motorists, consumer goods companies are continuing to see high input costs. Any drop in fertiliser prices is likely to come too late to boost this year’s food harvests.

The World Bank forecast after the invasion that global food prices would rise 20 per cent this year, far outpacing raw materials.

The impact is particularly grim in Africa, which usually imports grain from Ukraine as well as producing its own food. Fertiliser prices there have risen 300 per cent, and the continent is facing a shortage of 2mn metric tons, according to the African Development Bank. It has approved a $1.5bn programme to help farmers fill the gap but warns that total production could fall by 20 per cent this year.

Janet Yellen, the US Treasury secretary, said on Friday that the world was facing “an extremely difficult time for global food security” and urged the G20 group of leading nations to halt stockpiling and export restrictions on food and provide additional financial assistance to countries and people struggling with food insecurity.

Bill Gates, the philanthropist and Microsoft co-founder, flagged similar concerns this week, saying that the reduction in supplies of wheat, edible oils and other foods caused by the war in Ukraine was “driving up food prices, which will increase malnutrition and instability in low-income countries.” He noted in a blog post that improving agricultural productivity in Africa required “far more investment”.

While some consumer products makers and food retailers say they are hopeful that food price inflation will begin to ease, others are preparing for the worst.

Snack foodmaker Mondelez is seeing so much inflation and “availability issues” in edible oils and grains that “we are looking into flexible formulation to make sure that we can replace some ingredients and components that are in shortage with something that is more available,” Luca Zaramella, the chief financial officer said last month.

General Mills is predicting a “significant step up in input cost inflation” to 14 per cent for the fiscal year that started in June. CEO Jeff Harmening said last month that the maker of Cheerios as well as Pillsbury and Betty Crocker home baking products expects to see “reduced consumer spending power”.

FT : Investors warn of looming downgrades to US and European earnings forecasts

Investors warn of looming downgrades to US and European earnings forecasts
Profits are expected to grow for the rest of 2022, even as economic conditions sour

Expectations for US and European corporate profits have not fully adjusted to take into account the worsening economic outlook, according to a clutch of investors who warn earnings season could be a disappointment.

Analysts estimate companies listed on Wall Street’s S&P 500 will report 6 per cent year on year earnings growth for the second quarter, according to a survey by data providers IBES and Refinitiv. The rate of growth is forecast to rise to 11 per cent for the third quarter of the year.

Forecasts for Europe’s Stoxx 600 share index are even rosier, with analysts overall predicting 22 per cent earnings growth for the second quarter — in part because of the gauge’s heavier weighting of energy companies. In the third quarter, the growth rate is expected to increase to 29 per cent.


Some investors are sceptical about those projections, pointing out the mismatch between the progress that companies have guided analysts to expect and a macroeconomic picture, clouded by soaring inflation and business surveys, which suggest the US and Europe are heading into recession.

“We’re going to be seeing earnings downgrades, no doubt about that,” said Neil Birrell, chief investment officer at asset manager Premier Milton Investors. The consensus of analysts’ estimates, Birrell added, “looks like they are in cloud cuckoo land.”

Grace Peters, head of European equity strategy at JPMorgan’s private bank, added that corporate management teams will probably “start to admit” business conditions are deteriorating as the latest earnings season gets under way.

Purchasing managers’ indices, which collate executives’ responses to survey questions on topics such as business volumes and new orders and tend to predict how analysts’ expectations will move, have been pointing south. A PMI for the global manufacturing sector, produced by JPMorgan and S&P Global, hit a 22-month low in June.


“Usually when business confidence drops, analysts downgrade [earnings forecasts] and they haven’t been doing that as much as you’d normally expect,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.

The FTSE All World index of developed and emerging market shares has fallen more than a fifth so far in 2022, with the S&P 500 down by the same amount and Europe’s Stoxx 600 off 16 per cent. But some investment strategists say the likelihood of earnings downgrades is not fully priced into stock markets yet.

US equities are the “most vulnerable to earnings disappointment,” strategist at Oxford Economics wrote in a research note. “Margins are stretched [and] cost pressures are broad based,” they wrote.

US financial companies Morgan Stanley, JPMorgan and BlackRock kicked off the Wall Street quarterly earnings season by missing analysts’ forecasts.

Emmanuel Cau, Barclays’ head of European equity strategy, expects the Stoxx 600 to fall to about 380 points, from around 410 currently, if economic conditions unfold as the bank predicts and Russia cuts gas supplies in retaliation for Western support of Ukraine.

“Europe will be in a recession by the turn of the year,” Cau said, predicting that the consensus of analysts’ forecasts for 2023 will gradually change from 5 per cent earnings growth currently to a 5 per cent decline.

“At face value, equities are cheaper than they were six months ago,” Cau said. “But they are trading on earnings expectations that are too high. The valuations are misleading.”

FT : North Macedonia approves EU proposal to start accession talks

North Macedonia approves EU proposal to start accession talks
Membership talks have been given fresh impetus by Russian agression in Ukraine

North Macedonian lawmakers have approved a proposal to help resolve a longstanding dispute with neighbouring Bulgaria over history and language that opens the way for EU accession talks, a move that furthers the EU’s expansion in the Western Balkans.

The EU has stepped up efforts to convince the region’s countries to set aside long historical disputes and expand the bloc at a time when the war in Ukraine has elevated an urgency to complete enlargement and choke off increasing Russian influence.

North Macedonia’s government has accepted the French proposals after they were amended to guarantee that Macedonian would be a recognised language in the EU and that bilateral issues with Bulgaria would no longer be a factor in the accession talks. It was passed in the country’s 120-member parliament with 68 votes despite a walkout by the opposition, which has said it feared a “Bulgarianisation” of the country.

“Congratulations and huge thanks to the MPs who showed a democratic capacity today, supported the conclusions of the European proposal and voted for the European future of the country,” premier Dimitar Kovačevski wrote in a Facebook post on Saturday.

“There is no greater patriotism than supporting the prosperity of the country . . . Finally the Macedonian language will echo all over Europe. This is how you love the state, with wise and state decisions!”

Albania has been linked with North Macedonia in its own bid for EU membership, so progress on Skopje’s accession plan would also unlock Tirana’s EU bid, with a potential wider impact for expansion in all of the western Balkans, experts say.

“Congratulations to North Macedonia on the vote that now paves the way for opening the accession negotiations rapidly,” EU Commission president Ursula vin der Leyen tweeted. “It was an historic opportunity. And you seized it. A big step on your path towards a European future. Your future.”

North Macedonia was designated as a candidate for EU membership almost 20 years ago. It resolved differences with Greece in the Prespa agreement, joined Nato, only to be blocked by Bulgaria.

Tension between Bulgaria and North Macedonia stems from disputes over interpretations of history and other expressions of national identity in the former Yugoslav republic.

The liberal government of Bulgarian prime minister Kiril Petkov approved the French proposals last month just before it was ousted in a vote of no confidence, leaving the matter up to Skopje alone.

The opposition nationalist VMRO party of North Macedonia said it would continue to fight against the agreement.

Membership talks have been given fresh impetus by the desire to strengthen the EU’s presence in the Balkans and provide a bulwark against greater Russian influence.

Albania, for years beholden to the bilateral disputes, welcomed the North Macedonian vote.

“Finally,” Albanian premier Edi Rama wrote on Facebook. “Negotiations for Albania’s membership in the European Union have no obstacles . . . Albania’s absurd hostage is over.”

An Albanian delegation would leave for Brussels on Monday, he said.

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: Markets aren’t exactly full of optimism about China, but Mizuho analyst James Lee thinks it’s time for investors to take a fresh look at China’s internet sector.


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No update this week

Tech Trader:
-Markets aren’t exactly full of optimism about China, but Mizuho analyst James Lee thinks it’s time for investors to take a fresh look at China’s internet sector. The KraneShares CSI China Internet exchange-traded fund, a popular way to track Chinese internet stocks that’s better known by its ticker KWEB, has lost about two-thirds of its value over 18 months. It’s been pressured by the Chinese government’s crackdown on the tech sector and rolling factory shutdowns tied to the country’s zero-Covid policy.

The Trader:
-Mattel stock has had a good year. The shares are relatively unchanged from where they started 2022 thanks to the perception that toys are recession-proof, as well as hopes that the company will be able to sidestep the inventory problems that have hit many consumer-goods makers and the margin pressures affecting, well, everyone. Mattel gets a chance to test all that when it reports earnings on Thursday. The numbers aren’t particularly big—Mattel is expected to report a profit of 6 cents a share, an improvement from the 3 cents it reported during the same quarter the year before, while sales are expected to be up 7%, to $1.101B, from $1.026B. Expectations may actually be higher, however. JP Morgan’s Megan Alexander notes that investors might be anticipating earnings closer to 10 cents a share, something that would normally give us pause, but the hopes might be justified.
-It’s hard to describe another week of market losses as hopeful. The DJIA dipped 0.2%, the S&P 500 fell 0.9%, and the NASDAQ dropped 1.6%. The market, however, exhibited more resilience than might have been expected. After closing near its lows on Monday and Tuesday, the S&P turned large losses into small ones on Wednesday and Thursday, before closing up 1.9% on Friday. The market action was driven primarily by worries that the Fed would become even more aggressive to bring down inflation. The chances of a full-point interest-rate hike surged to more than 90% on Wednesday after June’s consumer price index increased by 9.1% from the year-earlier level.

Features:
Lawyers for Elon Musk filed papers with the Delaware Chancery Court, their first public response to the lawsuit filed earlier this week by Twitter seeking to enforce the terms of their merger agreement. The court should reject Twitter’s “unjustifiable request to rush this,” they said in their filing. Twitter has asked the court to expedite the proceedings, citing risks from the recent economic downturn and being held in limbo by a buyer. The company requested a trial by mid-September “to protect Twitter and its stockholders from the continuing market risk and operational harm resulting from Musk’s attempt to bully his way out of an airtight merger agreement.”

European Trader:
-Danish vaccine maker Bavarian Nordic is still in the trials stage with its Covid shot, making it a latecomer and dragging down its stock price. But its smallpox vaccine, alone in having been approved for use against monkeypox, gives the Copenhagen-listed firm a virtual monopoly. This could make the shares a buying opportunity. Bavarian Nordic stock has dropped from its March 2021 peak of 356 Danish kroner ($50.41) to a recent DKK243.

Emerging Markets:
-Nearly 5 months into Russia’s invasion of Ukraine, a cruel paradox persists: Western powers are substantially funding Vladimir Putin’s war machine by buying Russian oil and gas, while they fund Ukraine’s resistance with cash and weaponry. “We’re fighting a proxy war against ourselves,” laments Simon Johnson, former chief economist of the International Monetary Fund and now a professor at the Massachusetts Institute of Technology.

Commodities:
The lumber market has taken hits from rising inflation and a slowdown in the housing market, with lumber prices down more than 40% in the first half of the year. They could fall still further before bottoming out. Lumber has bucked the overall uptrend in the commodities market. The S&P Goldman Sachs Commodity Index, composed of 24 exchange-traded commodity futures contracts, jumped 26% in 2022’s first half. “Lumber truly has its Ph.D. in trading and is the ultimate canary in the coal mine when it comes to being a leading indicator for all other commodities,” says Greg Kuta, president and CEO of lumber broker Westline Capital Strategies. “The inherent volatility in lumber pricing is highly sensitive to both demand and supply dynamics, and is very quick to reflect changes in demand and supply on a micro level.”

Streetwise:
-Overall, the movie theater business is doing much better than feared, especially if we squint and extrapolate. One Wall Street analyst predicts 66% upside for IMAX and 40% plus a favorable dividend surprise for Cinemark Holdings. North American ticket sales during the first half were up 228% from last year, which tells us little, and down 31% from 2019, which isn’t a great comparison, either.

Barrons : Apple’s AirPods Are Everywhere. So Why Is This Stock in the Dumps?

Apple’s AirPods Are Everywhere. So Why Is This Stock in the Dumps?

Sometimes, even one of the hottest products on Earth can’t lift a stock.

German battery maker Varta VAR1 0.00% (ticker: VAR1.Germany) is widely believed to provide the lithium-ion micro-batteries that power Apple AAPL +1.15% AirPods, the most popular wireless earphone. But Varta’s stock has been cut in half over the past year, and it could well fall further. The main culprit: rising costs of raw materials and energy for its plants.

Stephan Bonhage, an analyst at Germany’s Metzler Capital Markets, has rated the stock a Sell, forecasting that the price will fall 19% to 64 euros ($64.53). “Overall,” he writes, the valuation of the shares is “in our view demanding, trading at a multiple of 27.5 times the expected earnings for 2023 against the background of clouding growth prospects, declining margins, and stiffening competition.”

Varta’s major claim to fame is the AirPod. Varta won’t talk about its customers, but Metzler and others have identified Varta as the maker of tiny batteries inside the device. Apple sold some 72 million sets of AirPods last year, according to TFI Asset Management. Apple didn’t respond to requests for comment about Varta.

In all, such “hearables’’ saw sales roughly quintuple from 2018 through 2020, accounting for about a third of Varta’s revenues. Varta makes a variety of other batteries for consumer, automotive, and industrial markets. But much of it looks to be coming under pressure.

The cost-of-living surge is denting consumer demand, and semiconductor shortages, combined with lockdowns in China, have caused business customers to curb production of electrical goods, some analysts say.

While Varta doesn’t disclose a sales breakdown of its divisions, analysts have made estimates. The core business, which makes household batteries, accounts for 38% of 2020 revenue, according to Bonhage. But there’s not much growth: Its mature and highly competitive market grows 1% to 2% annually.

Another 18% or so of revenue comes from providing batteries for hearing aids. But that market is shifting towards rechargeable power cells, so repeat business for nonchargeable batteries is declining.

Faster growing is its battery pack business, which makes rechargeable units for manufacturers of vacuum cleaners and other household items. But this generates just 5.5% sales, says Bonhage.

The company, based in Ellwangen, Germany, between Munich and Stuttgart, dates to 18887 and has a market value of €3.1 billion. Varta posted adjusted earnings before interest, tax, depreciation, and amortization, or Ebitda, of €282 million in 2021, a 17.4% increase on 2020, while sales grew 3.8% to €902.9 million.

It has forecast adjusted Ebitda between €260 million and €280 million for 2022—essentially flat. That’s based on sales between €950 million and €1 billion—up 10% or so, at best.

CEO Herbert Schein told Barron’s, “Varta’s strength is our power to innovate. We will continue our very successful growth strategy, which we have implemented in all of our business units. However, lithium-ion technology has the greatest potential, and this business is set to be the biggest driver of Varta’s future growth.”

While Barenberg analyst Charlotte Friedrichs thinks 2022 guidance is feasible, she says it requires Varta to perform strongly in the second half, achieving 15% to 20% year-on-year increases in Ebitda and sales. “We believe this is challenging, but possible in the absence of lockdowns in Asia or a material weakening in consumer demand,” she wrote. In other words, the economy might need a recharge for Varta to hit its numbers.