Introduction Delivering on funding goals is more important than ego satisfaction. Investors and their managers want to be winners, or at least feel like winners. That is why there are daily price movements published, which is the same reason ...


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Six Contributors to Future Performance


Delivering on funding goals is more important than ego satisfaction. 

Investors and their managers want to be winners, or at least feel like winners. That is why there are daily price movements published, which is the same reason that most US race tracks have eight to ten races a day. The one clear observation on both presentations is that it is almost impossible to be a winner in every investment and every wager, every day.

One of the lessons I learned at the track and investing for our clients is to be highly selective as to which contests that I choose to put money into.

My style of both investing and other wagering is to focus on what contests are important to win. This has led to the development of the TIMESPAN L Portfolios® which looks to meet critical payment needs broken into various time periods. With that as a guiding principle, I tend to sort the enormous amount of daily inputs we all are besieged with, by assigning them to different timespans. In that way, the information is put into period-based categories where the information is most useful to aid in achieving goals.

Six Timespan Sorts

What follows is how I sort the flow of information (and perhaps misinformation) into the most useful timespans.

1. Present trading environment-A quick look at the price indices for the three major US stock indices have very similar  patterns. In the recent burst of enthusiasm all three had upward price gaps which lasted for a few weeks. One of the rules of thumb is that eventually all gaps have to be filled by an equal and opposite reaction. This has been done. Soon after filling the gap, upward momentum stalled and now the price patterns appear to be in a top formation. The "bulls" would characterize it as a consolidation awaiting further, hopefully positive, developments. After all there has not been as much as a 1% decline in the value of the S&P500 in any single day since October 11th, 2016. (Barron's has noted that after the last period of 100 days without a single day drop of 1%; was followed a year later, when the index was up +75%.)
2. Current economic picture-While central banks tend to speak in terms of government sourced economic statistics, they are starting to react to the signs coming from the commercial world. Around the world many businesses are getting better with the only short term concerns is finding qualified help. We personally know of US businesses hiring and the apparent replacement of old help wanted ads with new ones at higher initial wages offered. Growth is spa radically  picking up globally selectively in Europe and significantly in Indonesia and Singapore. While not always accurate, The Economist has an article headlined “The global economy enjoys a synchronized upswing.” 

3.  China remains both the short-term and long-term wild card. US Secretary of State Rex Tillerson is in Beijing meeting with his counterpart.This is a ‘getting to know you’ meeting, trying to find areas of future cooperation. Combine this with the speech of Apple's* CEO on Saturday in Beijing and his meetings early next week with the leading political and economic leaders of China, which can further clarify the nature of Chinese progress to becoming an even bigger player on the world stage. While the current government of China has apparently managed its economy best in the world of large nations, a recession or even a major slow down in its growth would be destabilizing to the US and much of the world. This possibility does not appear to be priced into the global stock markets. 

4.  Market leadership and structure changes could be disruptive or opportunities. Charles Schwab* has issued an intelligent study that portrays that the superiority of small caps compared to large market capitalization stocks is going to be reversed due to both market liquidity concerns and valuations. This view could be supported by The Financial Times which reports a study that predicts that one-third of City (UK's Wall Street) analysts will lose their jobs due to regulatory disclosure practices. They note that this could produce more underpriced securities which will tend to be in small to mid caps. We have seen for sometime similar trends within the US which is one of the reasons that US small caps have performed so well as captured in a number of mutual funds. A Quarterly Institutional Review by Dimensional Fund Advisors demonstrates that the superior performance of many small caps comes from value and core funds not small cap growth funds. Our investment funds and portfolios will almost always have different mixes of Large Cap and Small Cap funds.

*Stocks owned either personally or in the private financial services fund I manage

5. The march of what is called “popularism” will probably continue despite this week's Dutch election. While that particular populist party did not come out as the feared leader, it did add to its number of seats while the victorious establishment party lost a much larger number of seats. Despite the sense of relief by the establishment's financial inherent leaders in France, the FT noted in a headline "Financiers lineup to engage with LePen." I speculate that unless the various establishment parties launch new programs that effectively address the levels of dissatisfaction being expressed globally, it is only a matter of time before there will be a political leadership change. (I am not suggesting that those that are not part of the governing bodies will themselves provide solutions, but have the advantage of the old slogan "throw the bums out." 

6. Final Worry-According to my old firm's research, on a global basis  investors have put $1.1 Trillion into Bond funds in the last three years compared with $750 Billion into Money Market funds, $569 Billion into Equity funds and $123 Billion into Mixed Asset funds. At some point with the built-in rise of interest rates and signs of inflation, bond prices will decline and put investors further behind in their needs for retirement capital. The bond market participants include not just slow moving investors, but also trading entities, including ETFs and hedge funds -  some of which borrow heavily against their portfolios. If bond prices collapse due to the lack of market liquidity one could see significant counterparties’ risks which could hurt the stock market regardless of the economic outlook. These counterparties may have to sell their equities at any price to meet their margin-called debts.  


My special Blog Post of March 15, entitled “We Cannot Escape Being Global” discussed the visit of Chinese President Xi Jinping’s to meet President Trump in Palm Beach.  The correct dates of the meetings are April 6 & 7. 

Click here to read my special blog post.
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A. Michael Lipper, C.F.A.,
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We Cannot Escape Being Global


I think about this blog every day, culminating in my weekly “Monday Morning Musings.”  Very occasionally events occur during the week that I would like to share as soon as possible. 

One of the approaches I use in this Blog is to relate current information to historical context.  This post is an example.  

Our Needs are Global

Almost all of our own economic activities, much of the food we eat and many of our social attitudes are influenced beyond our national borders. The whole concept of ‘national states’ presumed that the bulk of the population had a large number of common interests which were sufficiently different than our neighboring national states that created a specific legal identity. We were different than our neighbors. We choose to have "us" govern our national state which in the past represented our world.

“One World”

This belief is no longer true and matter of fact has not been true regardless of our laws and taxes for a number of generations. When Franklin Delano Roosevelt defeated Wendell Willkie for US President in 1940, he did something that no other  President has ever done before or since. (My late Mother was a political aide to Mr. Willkie.)

FDR sent Willkie around the World to meet with foreign leaders including some that were not presently within their governments as a way to build the critical alliances needed to defeat the Axis. As an outgrowth of this wartime trip came Wendell Willkie's book, "One World" which to a large degree predicted the reality of today’s increasingly close dependency of one national state with others. Almost every major international trend since at least WWII has reinforced these dependencies.

President Xi’s Visit

This week, due to the snow storms in the Northeast US, Ruth's and my return from Florida meetings has been extended due to extensive flight cancellations. In a classic example as to the impact of the broader world on our personal lives, we are staying at a Palm Beach hotel within about a mile of Mar-A-Lago, the unofficial winter White House of President Trump. Traffic and other security measures are strict and will be tightened even further for the April 6 & 7 visit of the leader of China to the US President.

Perhaps by the following Monday the pundits will be declaring who won, lost, or achieved a draw.  My guess is that over time, the pundits’ judgments will be proven at least to be incomplete and probably wrong.  China and the US share many of the same problems: ISIS, aging population, bloated bureaucracies and the re-definition our global roles. At best the two leaders will identify their similarities and differences.  The meeting may be as  important as the meeting at Yalta.

Recognize our Co-Dependence with China

The meeting of the leaders of the two largest economies in the world reinforces to me our co-dependence. China is the world's largest consumer of many traded commodities. These commodities are traded globally with daily fluctuating prices. These prices often represent inflationary pressures that eventually impact producer and consumer price indices that the central banks use in setting their monetary policies. I am particularly conscious of the Chinese impact on technology as it assiduously protects the largest consumer marketplace in the world and is still a major exporter of technological product. The drive of the present government to increase the portion of its internal economy devoted to services has a direct impact on the US as the largest exporter of services.

Investing successfully in China is difficult whether through joint-ventures or publicly traded shares. We are exposed to both in investing international funds and multi-national companies. Luckily we have other exposures, as investing in China has not today produced much in the way of cash dividends and who knows in the way of earnings. Nevertheless, I believe that all investors and many people will be affected by what happens in China. Thus, we need to recognize our co-dependence in thinking about both our portfolios and our lives. 
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A. Michael Lipper, C.F.A.,
All Rights Reserved.
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Managing Opportunity Costs


All who at least tangentially follow the stock market know that at some time in the future stock prices will experience a major decline. I know I am premature, but as a securities analyst, portfolio manager, investor and entrepreneur I need time to position my mind and my emotions.  I want to be prepared intellectually and emotionally to survive the decline and participate in the eventual subsequent rise.

As I have previously written, I believe sentiment or if you prefer the standard phrase, rising animal instincts, have become the driving force for stock prices rather than the various statistical ratios which as professional investors we are comfortable. The two present indicators I follow that demonstrate rising sentiment are, (1) the supposedly retail flows into Exchange Traded Funds (ETFs) and (2) the relative movement of bond yields.

Just at the time that preordained lists of stocks are showing less cohesiveness or if you prefer correlation, media are reporting a significant increase in the use of ETFs by the retail public. Stock prices within various groups are moving differently, thus individual security selection has become more needed for investment success. In the broad market indices the financial and utility sectors are moving not only at different speeds but in some different directions. Within the sectors there is considerable difference in individual stock price moves. For example, within the banking sector until quite recently the prices of many smaller banks have been much stronger than those of the mega banks. The price/earnings ratios on many of the smaller banks is considerably higher than those of their larger peers.

The yields on a list of intermediate credits tracked by Barron's has been flat thus far this year, 4.54% in the first week of the year and 4.57% last week shows relatively stable while there is less demand for a similar list of the highest quality bonds with their yields rising from 3.46% to 3.62% last week. The professionals in the bond market tend to be much quicker than equity people to changes in credit conditions.

First Week of 2017
Last Week
Intermediate Credit
Source: Barron's

Preparing Mentally and Emotionally 

As is often the case, we are our own worst enemies. When stock prices decline we tend to measure the fall either from peak prices or purchase prices. Neither is particularly useful in assisting future investment activities. Both peak prices and purchase prices are historical accidents and don't have any forecasting value.

We should go back to our base case whether we are serving institutional or individual investors. Our goal should be to arrange payments that will cause people to react positively to the intended use of the money. With that in mind, investment success is an intermediate step toward our goal of delivering the needed funding. Whether we succeed or not is the opportunity cost that we pay to have the opportunity to achieve our goals. One can look at high opportunity costs (losses, fees, taxes, and efforts including emotions) as premiums to get the chances of better results.

At the racetrack the objective is to walk away with more money than when we entered. Not only do we count our losing bets against our winners, but we should also include our expenditures. In both the racetrack and investment experience we should add in the time and expenses of our analysis, perhaps deducting something from the continuing value of our analysis. If one bets on favorites with low odds and expected higher probability, that is a grinding-out game. On the other hand if one chooses less popular and higher paying prices, if successful, typically the win/loss ratio will be worse than those of the favorite player. However, at the end of the day one can walk away with more money. For some, the second player (regardless of monetary result) could have more thrills than the winner of expected results. To many these thrills are in and of themselves a gain on the day unlike those experienced by the player who is with the crowd. In many ways the opportunity to achieve these thrills is an opportunity cost worth enduring.

Our problem as professional portfolio managers is to mix both extremes in a specific portfolio for a client's needs to make future payments. We believe that first recognizing the various timespans for future payment aids in identifying the levels of current and future risks which are appropriate for the accounts. Within each of the timespans one can employ the appropriate balance of lower risk and higher risk funds and securities. 

At the end of the day we get our thrills by meeting the payment goals of the account through a satisfactory level of investment success.

Post Script

Ruth and I hope that our readers in the Northeast US find themselves safe and warm during this coming week’s inclement weather.

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A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.

Handling Two Big Future Investment Losses


None of us know the future of our investments. Unless human nature is altered we should be prepared for two important losses. According to the Marathon Global Investment Review, the great Ben Graham* (in the Intelligent Investor)  warned investors of the probability that most of their holdings will fall by "one third or more from their high points at various periods." I see no reason not to accept his warning today. This is the first investment loss probability ahead of us.

*I feel drawn to any views expressed by Ben Graham. He and my old Professor at Columbia University David Dodd wrote the Bible for our business entitled,  Security Analysis. I am particularly susceptible to quotes from them. The New York Society of Securities Analysts which Ben helped to found honored me with the Benjamin Graham award for services to the society.

The second big future loss ahead of us is our reaction to seeing our wealth decline, perhaps materially. After each major market decline some investors in their mind retreat from taking on any more risk and withdraw from investing. Often they blame their loss on what the popular press claims was the culprit. That way it is easy to, in effect, give ownership to the bad people and policies that they think led to their realized loss. Rarely do they examine their own behavior and naiveté as a contributor to the loss of supposed value in their portfolio. Thus, they can transfer all of the responsibility to these external factors. In other words, the government, the leaders, acts of nature, new products, foreigners, etc., were the causes so they have passed the ownership of the calamity to others.  Actually, this is a small part of the real long-term loss. The real shortfall is the subsequent loss of opportunity. Fortunately, we live in an equity world that after each serious decline the surviving market prices rise and eventually top all prior peaks and of course valleys. Bottom line: one must be a participant in the game to gain the benefit of the recovery.

For many there is a third risk of loss, a different type of risk: career risk. We are already seeing investment professionals lose their jobs. Often the layoffs start at the bottom of the ladder. Today I know of good analysts, portfolio managers, institutional traders, and various administrative types that have been cut from investment advisors, brokerage firms, hedge funds and some market-making facilities. Hopefully after some difficulty many will survive and quite possibly start or get involved with the new entrepreneurial activities that will become tomorrow's winners.

There is another group who indirectly suffer from the career risks of others, their customers. The current environment, after years of mild investment progress, has had only eight months of slowly accelerating progress except for the last couple of months, when it has been gaining faster. Many careerists have not bought into the current rise, so their portfolios have risen more slowly than the popular markets. This is the final straw that breaks some of their clients’ backs or their investment committees. Many investors can tolerate middling performance when the markets are slow, but when momentum sets in, they want a higher level of participation. Except for race horses that are bred for and trained to come from behind, few come from behind and win in particularly long races.

What To Do Now

Others may disagree with my global belief that we have entered a different phase of the equity markets. Prices are generally rising and have passed out of the comfortable range in terms of average valuations. One clue to this is that most acquisitions are shifting to all or largely stock rather than cash deals. We are seeing proposed deals based on the breakup and sale of the various deal’s parts. Is this a signal that we should withdraw from the global stock markets?

While life is never easy for a conscientious professional investor, a good one can identify the appropriate tool kit for various markets. I believe we have entered the phase where sentiment is more important than published financial information. What is important is not the current facts, but how the market is interpreting the new facts in terms of views as to future stock prices. For example, as is often the case, one can see a lesser risk orientation in the corporate bond market. For the moment forgetting the narrowing spreads for high yield paper versus Treasuries because many of the new buyers are disguised equity buyers, they focus on intermediate credits. Barron’spublishes an index of intermediate grade bond yields. Since the beginning of this year the yields have come down 13 basis points and 100 basis points over the last year, indicating an increased demand for this paper. Similar yields for the highest quality bonds have actually gone up 5 basis points and declined only 21 basis points over the last year. All this arcane algebra is flashing the message that in the most conservative sector of our markets buyers are accepting higher credit risks. They perceive less chance of bankruptcies than a year ago and particularly since the beginning of the year. 

Many of the more retail-oriented sentiment indices are slowly beginning to move. One  indicator has me particularly interested: BlackRock believes that individuals are replacing trading groups as the main buyers of its Exchange Traded (ETF) index funds. I believe BlackRock’s retail investors are principally going into its Large Cap index funds, just at the same time there is a continuing trend of what I believe are mutual fund investors redeeming their Large Cap funds after reaching their investment goals. Actually I believe the main way BlackRock is seeing flows is from retail-oriented brokerage houses, often discount brokers. I am wondering if the flow is from brokers or investment advisors who are playing catch-up from being behind for a long time? Their clients are outer-directed and easily led. (I see fairly little signs that do-it-yourself, inner-directed investors are moving into Large Cap indices.) The reason for my skepticism is that when all the stocks in an index move together or are highly correlated, the low or no management fee is attractive. Today we are seeing that tight correlations are coming apart. Rank almost any industry in term of stock price performance now and a year or more ago. You will see the performance spread between the best and worst performer growing. If you want to get the best performance one needs to be in the better performing stocks or shorting the worst.

If I am close to being right, the move of the uninformed public being guided by career risk advisors is an important sign of a top.

In addition to sentiment indicators, a good technical market analyst can be useful. One that I follow has been writing about a major top within the next few years. Others have different views and timespans.

Winning Attitudes

Two wise investors from many years ago are worth paying attention to, even though they are very different. The previously mentioned Ben Graham became quite a stoic so he could tolerate the cyclicality of the market and be prepared to buy cheap stocks with good dividends and operating earnings. Jesse Livermore made and lost fortunes as a market trader. (He may have done some of his trading through my Grandfather's firm.) He is quoted as saying, "The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among professionals." Further, he said, "It was not my thinking that made big money for me. It was the sitting." 

I have had the privilege to converse with some of the great mutual fund investors over the last fifty years. In terms of the market and their funds during cyclical declines they were stoic and accepted the declines as a normal part of their business even though tension producing. However, one of the reasons that they were so good for so many years was they wanted to chat about their "mistakes" and what they learned from each other, and for the most part they did not repeat. Like all of us they made new mistakes. but they were always learning.

Compliance Adjustment

In last week's post I discussed the shareholder letter released last Saturday of Berkshire Hathaway. Since I did not reference the stock, I failed to proclaim that in both my personal and the financial services private fund I manage, that we own some shares. I hope no one was treating the post as a buy recommendation. My attitude is that we can learn a great deal from Warren Buffett and Charley Munger that is worthwhile beyond their stocks.
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A. Michael Lipper, C.F.A.,
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Critical Lessons from Two of the Smartest Investors


Trying to escape reliance solely on experience, I rely on my student skills for this post. I have indicated numerous times that the Neuro-economics professors/scientists at Caltech have shown most people use their cumulative experience as the main or sole basis for making judgments. I try to study current and past history as an important source of additional experiences.

This week I have turned to two of what many have called in their time the smartest men around, Sir Isaac Newton and Warren Buffett. The latter's annual letter came out Saturday morning and I read it before we drove to Mount Vernon to celebrate General George Washington's 285th birthday. While the letter was signed by Warren, it clearly contained some of Charlie Munger's insightful views and was probably edited by the incomparable Carol Loomis.

Sir Isaac Newton

Sir Isaac is acclaimed as  the identifier of the laws of gravity. For many of us market followers this is often translated to what goes up, comes down. We always hope that our particular investment will either continuously rise or we get off the back of the market tiger successfully before he runs in the other direction.

At this particular point I have been focusing on Sir Isaac's investment activities to guide my clients' and family's investment accounts. For almost any gathering of people who are involved with the market the question comes up, “Should we sell after this remarkable rise we have had in many stock markets around the world?” I should not claim forecasting skills, but I can serve up lessons from history.

The South Sea Company was what we would call today an unusually clever public-private partnership that was founded in 1711. The company was awarded a commercial trading monopoly with the lands in the South Seas (South America) and for this the company would assume the war debt coming out of the War of Spanish Succession which ended with the Peace Treaty of Utrecht in 1713. Originally the promise of the company was a 6% yield, but as the government offloaded more of its debt on the company, the promised yield was dropped first to 5% and then 4%. In the Peace Treaty the monopoly was translated to mean one ship a year and there were some restrictions as to the commodities to be traded, but with the fabled gold and silver production in South America the ownership of this team of wealth was deemed to be very valuable. In January of 1720, not quite 400 years ago, the stock was trading at £128, in February £175, March £330 and £550 in May. Somewhere in this parabolic price rise, Sir Isaac (being well trained in mathematics) sold out. Well and good for our hero.

The only problem was that on the way to its ultimate peak of 1000, Sir Isaac got sucked back in, and when it collapsed to 100, he had lost £20,000. According to one account that the loss would be worth £268 million today.

(For those who are interested I would be happy to discuss this bit of history and the roles of the government, the main bank, and other bubbles.)

One of the risks of using the past as a measuring device is that occasionally one can be premature and in some cases quite premature. It is not too bad missing the last opportunity at or near the top. The real penalty is borne by those who get sacked back in by envy and the belief that they can identify the top and go back in and stay in during an unconscionable decline.  I guess the best defense system is the willingness to accept both the loss of presumably large opportunity and actual realized losses during one's hasty parachute exits. 

With the lesson from Sir Isaac Newton's experience in my mind I am paying increasing attention  to expressed sentiments triggering actions. For example, according to one report, Renminbi transactions accounted for over 95% of total Bitcoin exchanges. I am seeing what I believe to be similar activities in some commodities as many Chinese are desperate to get some of their wealth out of their own currency. Further, I see some signs of potential large disruptions in  currencies and treasuries. My concerns are based on the fact that these markets are bigger than the stock markets and through margin and derivatives  heavily committed traders could quickly come into insolvency. This would be too bad for them and their investors. However, it could be very unfortunate to their counter-parties. Often these very same organizations supply credit and facilities to other market participants which could cause a disruption in the stock markets no matter what their level, but particularly if stock prices reflect an increase in speculation.

The Buffett Letter

I suspect that the lead item in Monday's financial press will be about his shareholder's letter released early Saturday morning.  Most of the focus will be about  the value of Berkshire Hathaway shares. As usual I will not compete, but focus as to broader implications on the report as if both Warren and I were back at Columbia.

The 52 year record of performance of Berkshire-Hathaway is truly remarkable. What struck me was over this period there were eleven years when the market value of Berkshire's shares went down and eleven years when the S&P 500 went down. What was interesting is that in eight out of eleven they were different years. This suggests to me while both time series produced good results (20.8% for Berkshire and 9.7% for the S&P 500), they are not good tracking devices for each other. Thus they are not well correlated to each other. One of the reasons I suspect that many accounts that are broad market index centered will be underperforming is that the correlations in today's market is widening. This theme was repeated in a couple of examples from the letter.

Every year since 2002 the operating income, including interest and dividends has produced more for the shareholders than capital gains. These results are the product of a relatively low turnover of its securities investments and the increasing shift to buying companies rather than securities.

The preference of Buffett and Munger to buy whole companies is producing better long-term results than buying publicly traded securities.  This is due to trading, when appropriate, the absence of dividend requirement and the ability to leverage. Other corporate investors have seen this as well which in turn has led to an absolute shrinkage in the number of US publicly traded companies. Further, there are fewer mega cap companies that can profitably use the ministrations applied by Berkshire and ValueAct.  Thus, I suspect that there will be more acquisitions made and there will be some medium cap deals that show larger potentials will be acquired. 

Berkshire reports the earnings of Clayton Homes under Financial and Financial Products rather in their manufacturing complex. While the bulk of the revenues for Clayton comes from manufacturing homes the bulk of the earnings comes from its mortgage operations. There are many public companies and their subsidiaries are similarly misclassified  compared to the better security analysis exercised by Berkshire. In a similar vein, many sector and industry index funds  have  been characterized improperly. Again this may come back to haunt certain sector and industry index ETFs.

All investors and their managers should be indebted to Warren Buffett's page 22 where he shows the almost ten year record of Protege Partners choice of five fund of funds,  which include some 100 individual hedge funds'annual performance from 2008 compared with an S&P 500 index fund. For the nine completed years, the S&P fund was the best in five years. The best of the fund of funds beat the Index fund four times and the others one to two times. What I take out of this are the following:

1.  It is difficult to the beat the market .
2.  The market indicator does not win in each year.
3.  In its best year the index was up +32.3% and worst was off -37.0%, both of more are reasonable expectations for some future years.
4.  It is quite possible that the funds suffered from over-diversification and this is true particularly true versus Berkshire itself.        

In Conclusion

One wag has suggested that the only thing the markets are guaranteed to create is humility. Thus, as a never-too-old student I hope to learn from others, so I make fewer investment mistakes and hope you do as well.
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