The bond market could be recreating the massacre of 1994

• Akin Oyedele
 
•  

• 5h
• 10,286
 
• 7

Andy Kiersz/Business Insider

Investors could be setting up a repeat of 1994's bond-market chaos, according to Deutsche Bank's Torsten Sløk.

From January to September of that year, the yield on the long 30-year bond spiked about 200 basis points, costing investors up to $1 trillion in losses. Fortune magazine called it "the great bond massacre."

The Federal Reserve was thought to be the major catalyst, as it raised interest rates faster than markets thought was necessary. That year, the Fed raised rates by 2.25%.

On Wednesday, the Federal Reserve's meeting minutes showed that it could go ahead and raise rates in June if labor-market and inflation data give it the green light.

But market expectations have long trailed the Fed's, and they still do.

"My baseline scenario is that the market over the coming months will move up toward the Fed's view of the outlook, and while there may be some bumps on the road, this is likely to be a smooth process," Sløk, Deutsche Bank's chief international economist, wrote in a note out Thursday.

He continued:

But the longer the market ignores the Fed, including the fact that the economy is soon at full employment and therefore closer to a broad-based uptrend in wages and inflation, the higher is the risk that we could see a move in bond markets similar to what we saw in 1994.

Sløk argued that fixed-income investors and the Fed are looking at economic data differently. The Fed is focused on its dual mandate of full employment and price stability. On these fronts, there has been progress, though inflation could be higher.

Meanwhile, the market thinks higher interest rates would come from earnings and hiring growth, which have slowed on an absolute basis. Investors are also focused on a host of factors outside the Fed's control, like China's economy, the US presidential election, and the British referendum in June.

For these reasons, they are quite bearish right now.Deutsche Bank

"When you reach full employment, that's when you will start to see a non-linear move up in wages and inflation, and it is this inflection point that the Fed is trying to get ahead of by raising rates now," Sløk wrote.

But if the market continues disagreeing with the Fed, bonds could sell off the way they did in 1994.

SEE ALSO: June is on the table

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Markets in the UK are convinced there's not going to be a Brexit

• Will Martin
 

• 5h
• 196
 
• 2

REUTERS/Lucy Nicholson

Britain's financial market players are becoming less and less worried about the prospect of Britain leaving the European Union — dubbed a Brexit — as they are increasingly pricing out Brexit risks.

According to a new report on the British economy from Deutsche Bank strategist Jack Di-Lizia, market volatility has stabilised after recent polls showed that the remain camp is pulling away.

Financial players now generally believe that remaining in the EU is a far more likely outcome on June 23, soothing fears about what a post-EU Britain might mean for the finance industry.

Following interventions in the debate from the likes of the IMF, US President Barack Obama, and the Bank of England, there's an increasing consensus that Britain will stick with the status quo come June. This week, Matt Singh, the polling analyst who predicted a Tory majority at last year's general election — the only person to do so — said that there is less than a 20% chance of Brexit.

That consensus, Deutsche Bank says, is driving growing strength in the markets.

Here is what Di Lizia has to say (emphasis ours):

The upcoming EU referendum continues to represent a significant driver of risk dynamics. However, with the referendum now less than 5 weeks away the market has shown signs of increasingly pricing out the likelihood of a Brexit across a range of financial market variables. Over the past week, a shift in the latest opinion polls towards a stronger lead for remain together with bookmaker’s implied probabilities underlining a clear lead for “Bremain” has helped drive more hawkish front end pricing, a tightening in basis markets and an appreciation in sterling.

From next Friday (27th May) the pre-referendum “purdah” period begins which will restrict the ability for those connected to government to campaign for either outcome. As a result, some of the noise surrounding the current campaign should be expected to die down, which may help the market consolidate around current probabilities as we approach the 23rd June. However, given the speed of this upward revision in the market’s probability of a “Bremain,” the risk remains for some retracement in the polls, which would become increasingly significantly as the vote gets closer.

Here are the charts Deutsche argues have helped the market start to price out Brexit:

Deutsche Bank

Deutsche Bank

Deutsche Bank pointed to increased expectations going forward across a variety of asset classes, including the pound, sovereign credit, and equities:

Ultimately, the signal to noise ratio from these polls remains poor while a wide spread exists between telephone and online polls. Nevertheless, these recent moves have led the market to revise lower the expected Brexit probability across a range of variables, repricing expectations of easing at the UK front end, strengthening sterling and driving UK basis and sovereign CDS spreads to retrace from their wides.

This isn't the first time that a seemingly decreased likelihood of Brexit has helped drive strength in the UK's markets. Earlier in May, Business Insider reported that currency traders in the UK were getting less and less worried about Brexit actually occurring, which helped the pound rebound strongly from multi-year lows early in 2016.

Deutsche Bank added that the recent strengthening in the pound, which has seen it gain more than 5% since the lows seen in February, has been strongly tied to Brexit polling — if polls favour remain, then sterling will move higher, and vice versa.  

Here is the chart:

Deutsche Bank

Mark Zuckerberg met with conservatives over allegations that Facebook suppressed news

• Associated Press and Rob Price

• 4h
• 503
 
• 5

REUTERS/Shu ZhangFacebook CEO Mark Zuckerberg.

Mark Zuckerberg on Wednesday held a wide-ranging discussion with a group of conservative commentators who said afterward the Facebook CEO acknowledged the giant social network has a problem reaching conservatives.

The meeting at Facebook's Menlo Park, California, headquarters came about after a report accused the company of harboring a bias against conservative views.

S.E. Cupp, a columnist with the New York Daily News who attended the meeting, said Facebook executives "were very clear to acknowledge that there is a problem and the problem is a serious one."

Facebook wants to restore the "trust" of conservatives

Cupp said Zuckerberg, Chief Operating Officer Sheryl Sandberg, Vice President Joel Kaplan and board member Peter Thiel mostly listened to the 17 conservatives who attended.

While the Facebook executives did not comment further on an internal investigation into allegations of political manipulation, they explained how difficult it would be for Facebook employees to inject bias into what stories make it into the "trending topics" section of the site or on individual users' news feeds, Cupp said.

The Facebook team also said any such tampering would be "philosophically against both the mission of the company and Mark's personal mission," Cupp said. "I believed them."

Rob Bluey, editor in chief of the website The Daily Signal, made similar comments to Fox News' Greta Van Susteren shortly after the meeting ended.

"They certainly acknowledged that there was a problem with getting the message out to conservatives," he said.

Here's Barry Bennet, one of Donald Trump's campaign aides:

 Follow

Barry Bennett ‎@BBennett152

Great meeting & first step at Facebook today. Facebook is committed to being an open platform for all political views. More work to be done!

7:45 PM - 18 May 2016

 
•  33 Retweets
 
•  1616 likes

Among others in attendance, according to Facebook, was radio host Glenn Beck, American Enterprise Institute President Arthur Brooks, Tea Party Patriots CEO Jenny Beth Martin and Brent Bozell, president of the Media Research Center.

Bozell said in a statement afterward that the meeting was "very productive."

"There has been a serious issue of trust within the conservative movement about this issue, but everyone in that room, on both sides, wants to see it restored," he said.

The meetings were "productive," Brooks said. "I hope that this is the beginning of serious efforts to combat the risk of systemic bias. Facebook has a tremendous opportunity to out-innovate old media models and win over customers who are hungry for ways to separate the signal from the noise. That won’t happen if new media falls victim to the same traps that have damaged the reputation of the traditional press."

Facebook spokesman Andy Stone confirmed that was the tenor of the meeting.

"We've built Facebook to be a platform for all ideas."

In a Facebook post afterward, Zuckerberg did not directly respond to allegations that Facebook employees suppressed conservative stories on its "trending topics" feature. But he said, "I know many conservatives don't trust that our platform surfaces content without a political bias."

"I wanted to hear their concerns personally and have an open conversation about how we can build trust. I want to do everything I can to make sure our teams uphold the integrity of our products," he wrote.

The CEO also played up the prominence of Facebook's conservative audience. "The reality is, conservatives and Republicans have always been an important part of Facebook. Donald Trump has more fans on Facebook than any other presidential candidate," he wrote. "And Fox News drives more interactions on its Facebook page than any other news outlet in the world. It's not even close."

Here's Zuck's full post:

Zuckerberg invited the group after the tech news site Gizmodo claimed that Facebook downplays conservative news subjects on its trending feature. Facebook denied the report, which relied upon a single anonymous individual with self-described conservative leanings. The company said it is investigating the matter.

Cupp said the viewpoints of the conservatives and the Facebook executives were aligned on issues such as data security, privacy, deregulation and free markets.

"We have a lot more in common than public perception would have you believe," she said.

Facebook's trending topics are most visible on the desktop version of the social network, although it is possible to access them on mobile too.

On browsers, the topics appear on the top right corner, separate from the news feed containing updates from your friends and family. On mobile devices, users can tap on the search bar to see the top trends, but they can't see separate categories.

Topics that appear as trending can have a self-fulfilling effect, as more Facebook readers see and share the items, and other news organizations decide to write their own stories.

More: Associated Press Facebook Censorship Conservatism

Cisco stock pops on Q3 earnings beat

• Julie Bort
 
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• 18h
• 1,751

YouTube/CiscoCisco CEO Chuck Robbins

Cisco just reported its third quarter earnings and we're examining them now.

It reported:

EPS Q3 EPS $0.57 versus expectations of $0.55, that's a beat.

Revenue of $12 billion versus expectations of $11.97 billion, another slight beat.

Investors are also happy with Cisco's solid guidance.

It expects the next quarter to show 0%-3% Y/Y growth (which excludes the set-top business that Cisco sold) and EPS of $0.59-$0.61. Analysts were expecting actual revenue to decline 3.3% and EPS of $0.58.

The stock is up about 5% in after hours trading.

Here's the full press release.

Cisco Reports Third Quarter Earnings

Solid Quarter Driven by Strong Execution; Continued Strong Margins and Momentum in Growth Areas

• Q3 Revenue : $12.0 billion
  • Growth of 3% year over year -- Q3 guidance was 1% to 4% growth year over year (normalized to exclude the SP Video CPE Business for Q3 2015)
• Q3 Earnings per Share: $0.46 GAAP; $0.57 non-GAAP
• Q4 Guidance:
  • Revenue: 0% - 3% growth year over year (normalized to exclude the SP Video CPE Business for Q4 2015)
  • Earnings per Share: GAAP $0.48 - $0.53; Non-GAAP: $0.59 to $0.61

Cisco today reported third quarter results for the period ended April 30, 2016. Cisco reported third quarter revenue of$12.0 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.3 billion or $0.46 per share, and non-GAAP net income of $2.9 billion or $0.57 per share.

"We delivered a strong Q3, executing well despite the challenging environment," said Chuck Robbins, Cisco chief executive officer. "I'm pleased with our performance today as well as the progress we're making in transitioning our business to a more software and subscription focus, which we'll continue to apply across our entire portfolio."

GAAP Results
		Q3 2016					Q3 2015					Vs. Q3 2015
Revenue (including SP Video CPE Business for all periods)		$	12.0		billion		$	12.1		billion		(1	)%
Revenue (excluding SP Video CPE Business for all periods)		$	12.0		billion		$	11.6		billion		3	%
Net Income		$	2.3		billion		$	2.4		billion		(4	)%
Diluted Earnings per Share (EPS)		$	0.46				$	0.47				(2	)%

Non-GAAP Results
		Q3 2016					Q3 2015					Vs. Q3 2015
Net Income		$	2.9		billion		$	2.8		billion		3	%
EPS		$	0.57				$	0.54				6	%

The third quarter of fiscal 2016 had 14 weeks compared with 13 weeks in the third quarter of fiscal 2015.
A reconciliation between net income and EPS on a GAAP and non-GAAP basis is provided in the table following the Consolidated Statements of Operations. Supplementary information related to other GAAP and non-GAAP measures is also provided in the tables following.

"Once again we delivered a solid quarter in Q3, with 3% top line growth, and even faster non-GAAP EPS growth and strong margins," said Kelly Kramer, Cisco executive vice president and chief financial officer. "We executed well on our financial strategy, allowing us to invest in our business model transition to software and recurring revenues so that our customers are able to consume Cisco technology in the way that is best for their business."

Financial Highlights for Q3 Fiscal 2016 All comparative percentages are on a year-over-year basis unless otherwise noted.

All revenue, non-GAAP, and geographic financial information in this "Financial Highlights for Q3 Fiscal 2016" section are presented excluding the SP Video CPE Business for prior periods as it was divested during the second quarter of fiscal 2016 on November 20, 2015.

Revenue -- Revenue was $12.0 billion, up 3% with product revenue up 1% and service revenue up 11%. Revenue by geographic segment was: Americas up 4%, EMEA down 2%, and APJC up 10%. Product revenue growth was led by Security, Collaboration and SP Video which increased by 17%, 10% and 18%, respectively. Wireless and Data Centereach increased by 1%, while Switching and NGN Routing decreased by 3% and 5%, respectively.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were 64.3% and 63.8%, respectively. The increase in the product gross margin compared with 61.6% in the third quarter of fiscal 2015 was primarily due to continued productivity improvements and the divestiture of the SP Video CPE Business, partially offset by pricing and to a lesser extent product mix.

Non-GAAP total gross margin and product gross margin were 65.2% and 64.5%, respectively. The non-GAAP product gross margin was unchanged compared to the third quarter of fiscal 2015 as continued productivity improvements were offset by pricing and to a lesser extent product mix.

GAAP service margin was 65.9% and non-GAAP service gross margin was 67.1%.

Total gross margins by geographic segment were: 66.3% for the Americas, 65.5% for EMEA and 60.4% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.7 billion, up 3%. Non-GAAP operating expenses were $4.2 billion, up 4%, and at 35.2% of revenue. Headcount compared with the end of the second quarter of fiscal 2016 increased by 1,447 to 73,104, driven by additional headcount from acquisitions and investments in key growth areas such as security, cloud and software.

Operating Income -- GAAP operating income was $3.0 billion, up 2%, with GAAP operating margin of 24.9%. Non-GAAP operating income was $3.6 billion, up 5%, with non-GAAP operating margin at 30.0%.

Provision for Income Taxes -- The GAAP tax provision rate was 23.8%. The non-GAAP tax provision rate was 22.0%.

Net Income and EPS -- On a GAAP basis, net income was $2.3 billion and EPS was $0.46. On a non-GAAP basis, net income was $2.9 billion, an increase of 4%, and EPS was $0.57, an increase of 6%.

Cash Flow from Operating Activities -- was $3.1 billion an increase of 1% compared with $3.0 billion for the third quarter of fiscal 2015.

Cash and Cash Equivalents and Investments -- were $63.5 billion at the end of the third quarter of fiscal 2016, compared with $60.4 billion at the end of the second quarter of fiscal 2016, and compared with $60.4 billion at the end of fiscal 2015. The total cash and cash equivalents and investments available in the United States at the end of the third quarter of fiscal 2016 were $6.3 billion.

Deferred Revenue -- was $15.3 billion, up 8% in total, with deferred product revenue up 9%, driven largely by subscription-based and software offerings, and deferred service revenue up 7%. Cisco continued to build a greater mix of recurring revenue as reflected in deferred revenue.

Days Sales Outstanding in Accounts Receivable (DSO) -- was 33 days at the end of the third quarter of fiscal 2016, compared with 33 days at the end of the second quarter of fiscal 2016, and compared with 37 days at the end of the third quarter of fiscal 2015.

Other Financial HighlightsIn the third quarter of fiscal 2016, Cisco declared and paid a cash dividend of $0.26 per common share, or $1.3 billion. For the third quarter of fiscal 2016, Cisco repurchased approximately 27 million shares of common stock under its stock repurchase program at an average price of $24.08 per share for an aggregate purchase price of $649 million.

As of April 30, 2016, Cisco had repurchased and retired 4.6 billion shares of Cisco common stock at an average price of$20.99 per share for an aggregate purchase price of approximately $95.8 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $16.2 billion with no termination date.

Acquisitions

During the third quarter of fiscal 2016, Cisco completed the following acquisitions:

Jasper Technologies -- provides a cloud-based Internet of Things (IoT) service platform to help enterprises and service providers launch, manage and monetize IoT services on a global scale.
Acano -- provides on-premises and cloud-based video infrastructure and collaboration software.
Synata -- will enable us to deliver search capabilities for collaboration cloud applications.
Leaba -- a fabless semiconductor company whose semiconductor expertise is expected to help to accelerate Cisco'snext generation product portfolio and bring new capabilities to the market faster.
CliQr -- provides an application-defined cloud orchestration platform that is expected to help Cisco customers simplify and accelerate their private, public and hybrid cloud deployments.

Business Outlook for Q4 Fiscal 2016 Cisco estimates that GAAP EPS will be $0.48 to $0.53 which is lower than non-GAAP EPS by $0.08 to $0.11 per share in the fourth quarter of fiscal 2016 as follows:

Q4 2016
Share-based compensation expense			$	0.05	-	$	0.06
Amortization of purchased intangible assets and other acquisition-related/divestiture costs				0.03	-		0.05
	Total		$	0.08	-	$	0.11

Share-based compensation expense is expected to impact Cisco's results of operations in similar proportions as the third quarter of fiscal 2016. Amortization of purchased intangible assets and other acquisition-related/divestiture costs will be reported as GAAP operating expenses, cost of sales, or other income/(loss) as applicable. Except as noted above, this guidance does not include the effects of any future acquisitions/divestitures, asset impairments, restructurings and tax or other events, which may or may not be significant unless specifically stated.

On November 20, 2015, during the second quarter of fiscal 2016, Cisco completed its divestiture of the SP Video CPE Business. In order to provide a clear view of Cisco's continuing expected financial performance, the revenue guidance for the fourth quarter of fiscal 2016 is normalized to exclude the SP Video CPE Business for the fourth quarter of fiscal 2015. The corresponding revenue in the fourth quarter of fiscal 2015 for the SP Video CPE Business was $487 million.
Cisco expects to achieve the following results for the fourth quarter of fiscal year 2016:

Business Outlook for Q4 2016
Revenue (normalized to exclude SP Video CPE Business for Q4 FY15)		0% - 3% growth Y/Y
Non-GAAP gross margin rate		63% - 64%
Non-GAAP operating margin rate		29% - 30%
Non-GAAP tax provision rate		22%
Non-GAAP EPS		$0.59 - $0.61

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Tesla is selling $2 billion of shares

• Matthew DeBord
 
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• 17h
• 22,226
 
• 35

Lucy Nicholson/ReutersTesla CEO Elon Musk.

Tesla Motors  $213.64

TSLA

+/-+4.14

%+2.00

Disclaimer

Tesla will sell $2 billion of its shares, the company said Wednesday.

"Tesla is offering about $1.4 billion of shares with the remaining shares to be sold by Elon Musk to cover tax obligations associated with his concurrent exercise of more than 5.5 million stock options," the automaker said in a statement.

"On a net basis, Mr. Musk will increase his overall Tesla shareholdings through these transactions."

Tesla said that it would use the capital it raises to "accelerate the ramp" of its Model 3 mass-market vehicle.

After Tesla reported first-quarter earnings, Musk said that the company would aggressively ramp up its production and delivery schedule, with 500,000 vehicles to roll off assembly lines in 2018.

That's two years ahead of original 2020 target.

Tesla is also constructing a battery factory in Nevada, to provide the lithium-ion cells it will need to create battery packs for all those cars.

The fundraising confirmed expectations across Wall Street, though the $1.4 billion Tesla is more than some analysts — including Goldman Sachs' Patrick Archambault — had anticipated.

Morgan Stanley and Goldman are leading the underwriting, Tesla said.Screenshot via Google Finance

The shares shares fell about 4% in trading after the markets closed Wednesday, more than wiping out the day's gains.

The Palo Alto-based electric-car maker raised $738 million in August 2015, when shares were valued at $242.

Tesla has repeatedly said that it maintains a comfortable cash position at about $1 billion.

But the company's shares have also recovered from a swoon earlier this year, and while they're still well below a trading peak of over $290 set in 2014, Musk and his team may have looked at the market and decided that this was the best time to fill the war chest.

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