CVS

I have a lot of catching up to do on two leftover posts from the last two radio shows plus other blogs I have wanted to compose on issues.  A question about CVS requires more immediate attention.

On the last radio show, 1/2/2010, a caller asked about CVS and said the PE was 13.  We do not screen calls and this means there is no way to have data on my personal computer screen already up to answer specific questions.  On this day, the station's wireless network was not strong enough to load any website much less the two services I normally have up in case anyone asks a specific question.  I pulled up a public website on the station's computer with an old square monitor which could not display a full page and I had to move the screen display right-left to read data.  Unfortunately, this public site also had a typo for PE at 1.3 when it should have read 13.1 (13.9 today).

Be that as it may, I was right in my quick review of the financial information and key ratios and description of the company and the advice which I gave, which was that I would not buy this stock.  As I explained to the caller, I never recommend a buy for a stock or fund on air, because should a statement could be construed by any one listening, without regard to individual suitability, as applying to them.  I might say that a stock or fund might be worthy or research or being placed on a watch list.

I have a "Disciplined Rules for Buying and Selling Stocks" that I give clients, which has 39 disciplined investing rules.  It could have more, but the 39 are enough to overwhelm most common investors.

CVS has a return on equity (ROE) of 10.9%, it should have at least 15% to be considered.  It appears that its history of increasing annual earnings will disappoint in 2009 with earnings close to 2008.  You want to see quarterly earnings up 25% or more and three such successive quarters are even better.  You want to see quarterly sales up 25% or more (last quarter for CVS was 18% and next quarter is estimated at 11%).  Free cash flow is only .55%.

I told the caller that CVS has been making acquisitions and it may be having difficulty in integrating these acquisitions and that it has a benefits management program that may be having earnings problems with respect to competition and Medicare Part D.

I told the caller that there was a very sharp price drop in November and institutional investors were selling more than buying (this week has seen an increase in institutional buying).  These are very bad signs as there must be a reason.  In fact, the price dropped below it 200 day line, which is a huge negative, on November 5th, which is the same day CVS held an analysts cal conference.  We discussed that the Long's acquisition was still being integrated into CVS.  The announced that the director of the benefits management program was retiring and the marketing director was being replaced.  The benefits management program has lost several contracts as the result of competition and the economy and it has had problems, as many benefits management programs have had, with properly underwriting its Medicare Part D program, which has resulted in smaller margins and less revenue and lower profits.

This stock belongs ranks 4th in its market group, although second in EPS.  There are 188 industry groups performing better in the market.  Its profit margin is 6.8%.  It debt to equity is 23%.  75% of the stocks in the market are performing better than CVS.  It is going to take a considerable effort to reach a proper buy point.

I was right in my advice despite technical difficulties.  This might be a stock one would place on a watch list, but nothing more.


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AIG & Geithner

Yesterday, I read blog after blog and article after article discussing how Geithner as President of the New York Fed told AIG to not disclose the favorable swap payments to Goldman Sachs and other large banks.  We were disconcerted, because this is not a new story.  We have discussed this on our radio show and in this blog on several occasions over many months. Other blogs have discussed this issue in the past.  The story has hit mainstream media through this New York Times blog.  Bloomberg had a piece also. 

Has it now become "acceptable" for the main stream media to discuss the actual facts?

And let us not forget Geithner's involvement as New York Fed President in the the stock owner's fraud over disclosure of losses in the Merrill Lynch acquisition by Bank of America.

As I have been saying for months, Geithner and Larry Summers need to go.  They will have no trouble finding work with one of the large banks, which have become even larger under the Paulson/Geithner restoration of the financial pre-crisis status quo.


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Resurrection

As we have informed our radio show listeners, this blog has been down since 3:08 AM CST on 12/24/2009.  On 12/23/2009, Mark Thoma, an economics professor at the University of Oregon, published a link to our Monetary Policy post at 11:02 PM PST on his blog the Economist's View.  Approximately, thirty minutes later he posted a del.icio.us link to the Monetary post on Twitter blog feed.  Within two hours, Google's Blogger shut this blog down, we are assuming, because we had many views from two links coming into one post with links within the post that triggered automated software.  When we received the notification, we immediately asked for the blog to be restored at approximately 10 AM on12/24.  There is no means of direct communication with Google's Blogger.  The form provides a button -- and only a button -- to send a request.  Then you wait.

Over a year ago, Yves Smith, a financial consultant, of naked capitalism had a similar experience.  She got her blog back up, after every reasonable business method for contacting anyone at Google was not successful, when an individual she knew who had a brother working at Google talked to his brother.  The experience caused her to set up her blog on a website totally under her control.

As we have indicated on the radio show, we have started the process to establish our own website for this blog.  As a business management and financial consultant who specializes in problem solving, I do not wait and get nothing done.

 In the meantime, we were able to submit the Monetary Policy post as an article and it was accepted at a national financial internet publication and published in the same issue as an article by the economist Nouriel Roubini.on 12/30/2009.  Two other posts were also accepted a published: "China's Spending Bubble" and "Double Dip Probability - Leverage, the US and China"

The blog is back up, because Felix Salmon, who is an economics blogger at Reuters, personally intervened and contacted an individual at Google's Blogger.  Amazingly, this blog was live within six (6) minutes of his communication.  I owe Felix Salmon a debt of gratitude I will probably never be able to repay.

While we have an independent website for this blog created, we will continue to post here.




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Monetary Policy: Inflation-Deflation, Debt, Excess Reserves, Currency Volatility

The debate over the various aspects of monetary policy, how the Federal Reserve is handling the current financial crisis, and where the Fed's policies are taking us is heating up.  The Fed has allowed the banks to park excess money on deposit with the Fed to bolster reserves and this has provided the incentive to not lend.  The ECB, on the other hand, has had, for some time, an interest penalty which charges member banks for depositing excess reserves with it rather than putting those reserves to work in their respective economies by lending.

We have seen other countries taking action to protect their currencies from the weak dollar with increased central bank interest rates and capital controls to stem the build up of asset bubbles in their country and/or to protect their ability to export competitively.  China is pegging its currency to the Dollar and not allowing it to float freely.  China is trying to play both ends against the middle to their advantage.  We have had two posts on the China bubble including one with extensive links.

Edward Harrison had a post on naked capitalism dealing with currency volatility in which he argues that is all about debt control.  He has added another post on monetary and fiscal stimulus in which he argues it is really a debate on the role of government and its limitations.  In another post he has argued that the stimulus has been co-opted to protect the financial sector's status quo before the financial crisis and the monies have been "malinvested".  Paul Krugman has argued that the issues are for what purpose the debt is increased and creating the conditions by which it will be reduced.  His argument is that the causes of the deficit matter and are directly related to the efficient use of the money to create an economy that will reduce the debt more efficiently and quickly with GDP growth rather than inefficiently and over a much longer and more painful time.

Steven Keen has always been devoted to the necessity to control debt and the perils of leverage.  He recently reprinted a post by Mike Shedlock which begins with a paper by Robert Murphy that I linked to in my last Leftovers post.  Shedlocks's article concentrates on fractional reserve banking and how that approach argues that banks cannot lend because the money is really not there - it is a fictional construct.

Mark Thoma has recently written on the monetary policy with near zero interest rates and the conflict with fiscal policy and which should take the lead.  His article discusses the effect on inflation and the need for a price-level target with its reaction oriented pitfalls.  He wrote the article to explain quantitative easing to which he is basically opposed.

Bill Mitchell, the Australian anti-thesis to his fellow countryman Steve Keen, has written two articles on bank reserves.  In the first he argues that bank reserves do not expand lending and that fiscal policy is the most efficient way to create jobs.  He is very opposed to quantitative easing and is very critical of Krugman.  This article shows how economists with different beliefs can often approach the same problems with similar results for different reasons.

In Mitchell's second article, he argues that bank reserves are not inflationary.  The liquidity functions of a central bank are not intrinsic to the inflationary effect of the spending.  He addresses the excess reserve concept and the effect of near-zero interest rates on fiscal policy, relation to aggregate demand, and the necessity of government "to balance aggregate spending to match the capacity of the economy to absorb it."

In the final analysis, it comes down to central banks coordinating monetary policy with the government's fiscal policy to control inflation, provide liquidity, and directly target and control debt creation and spending with targeted lending for economic growth (like small businesses) and timely job creation.  While Larry Summers has said long term unemployment is an unavoidable component of this recovery and the Fed appears to be using unemployment to hold inflation down, the use of long term unemployment to deleverage debt and control spending  is not an acceptable fiscal policy in a republican democracy.  It will take 300,000 new jobs every month for five years to maybe get back to pre-financial crisis employment levels.  Government needs to get cracking and let Summers and Geithner go to work for Goldman Sachs (how long will it take Goldman Sachs to take the company private?).

The developing argument that lowering the minimum wage will spur employment, while the millions of dollars awarded for the short term risky behavior of investment bankers bonuses, is off limits for regulation, is corpulently corrupt.  It is the very basis of the unethical business model of an anointed elite's righteous greed.



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Dysfunctional Politics & the Beginning Depression

We have noted in past radio shows and prior posts how the Fed appears to be using unemployment to hold down inflation.  We have noted that the "Recovery" appears to be focused solely on the return of the financial system status quo prior to the Financial Crisis and the resumption of risky but profitable business trading.  Volcker has commented on the fact that no economy, which has 30% of its GDP from synthetic financial services, can continue without risking another financial crisis.  In fact, we have noted the "Recovery" appears to be setting the stage for the very same financial crisis.

In a long post Edward Harrison  has written on his belief that the Recession is over but the Depression has just begun.  His argument is essentially that the political process, of which Congressional actions are only one example, has created a dysfunctional economic debate, economic recovery policies, and a divisive political debate which serves the special interests but not the Nation.  He goes into some detail on what it means globally as well as nationally and what needs to be addressed.  While I do not entirely agree with him, his arguments are very worthy of consideration for anyone who is desirous of dealing with the economic conditions as they exist.

It is well known that I believe Geithner and Larry Summers need to go, because they serve Wall Street more than the Nation.  Washington'sblog has been very good at delineating Summer's insistence on his way or no way to the point where Volcker is now in Europe speaking for financial reform because Summers has muzzled and isolated him in the United States.  Still, there is opposition loyal to President Obama which are attempting to debate and contradict him, however, dangerous that may be.  Despite what Summer's says, unemployment will continue to rise and it cannot be ignored.  Read the post "Larry Summer's is like the guy who yells the Sun really does revolve around the Earth ..." and sharpen your critical skills.

In past radio shows we have talked about food shortages and riots, economic protests, and even a Joint Special Operations University faculty member's speech at a former intelligence officers conference about the possibilities that prolonged economic crisis could cause social upheaval in countries.  My first career was intended to be military and I still do extensive readings on military subjects including papers and publications at the War College and the JSOU.  It again appears that there will be food and commodity shortages with increasing prices in 2010.  There are two scenarios which could evolve with one being demonstrations, riots, and perhaps revolution in some parts of the world and the other being that the population will become so demoralized by their treatment from the elite who run their governments that they will be passive and do what they are told.  Here is one recent article that lists a variety of sources from the establishment and from the fringe for your critical review.  Here is an article about how a demoralized people can be made to be passive and do what they are told, although there are more scholarly books over the last 60 years.  Constructive political action by an educated and knowledgeable public is not something that should be suppressed in a healthy republican democracy.

James Kwak in The Baseline Scenario has also addressed his frustration with the dysfunctional qualities of the political and economic debates with a "partisan post" on the 8 things of which he is sick.

Again these links are provided for your critical review as comments worthy of being analyzed and thought about in order to peek your research interests or to form opinions which can be substantively argued.





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Leftovers from 12/19/2009 Show

On the show, while discussing the new CPI inflation numbers, I mentioned an article by the economist Robert Murphy, who is of the Austrian School of economics and would be expected to be talking about deflation, in which he talked about the growing inflation rate going forward just as I have been.  His paper actually predicted the November inflation announced in December as 1.7% and it was 1.84%.  He indicated correctly that inflation will continue to rise, perhaps sharply, because the year to year is starting with the end of the 4th Quarter 2008 when prices had fallen significantly.  He is projecting 2.7 for December inflation announced in January; I am saying it will be between 2.8 and 2.9%  His paper can be found here.

I mentioned that Bloomberg.com and other US media have been ignoring or calling Volcker's European speaking tour in which he calling for financial reform now and the end of "too big to fail" as ineffective and meaningless.  Simon Johnson of The Baseline Scenario and a former IMF economist thinks otherwise and has had two posts demonstrating the strength of Volcker's call for reform and the attention it has gotten.  In "Paul Volcker Picks up a Bat" he lays out the strength of Volcker's strategy to influence financial reform and in "Wake Up Gentlemen" he lists Volcker's reform points and the public platform he is using more and more.  We talked two weeks ago about his UK speech and here is his interview with Der Spiegel when he gave a Berlin speech.  Larry Summers has gone to excessive lengths to limit and marginalize and muzzle Paul Volcker.  Fortunately, when you limit the options of a man like Paul Volcker you get a man who has nothing to lose and acts.

The economist Nouriel Roubini has made a comparison of the current financial crisis and the the 1930's and found that the same optimism that pervades the media and market in 1937 before a double dip is very similar to what is happening now. I have made similar historical and data comparisons on more than one occasion.  I have been talking about the weak US dollar and the carry trade it has spawned, which the Fed denies  is happening, and Roubini has been talking about it also and sees at least six months more of carry trade.  Two weeks ago we talked about gold and how a savings account over the last thirty years would have had more appreciation than Gold.  It is a matter of when one bought gold and at what price.  It is one thing to have bought it at $250 or $400 and another if you bought it at $800 or higher.  Roubini has written about the flaws in gold investing and how gold may presently be in a bubble and posed to decline in "The Gold Bubble and the Gold Bugs".He ends by indicating that if investors really fear a global meltdown then they should be buying guns, ammunition, canned food, stocking water, and other commodities which can actually be used rather than buying gold.

There has also been two studies published  on whether gold is a safe haven from equities or bonds in developed and developing nations and the results were quite mixed and disparate.  What it comes down to is it is not just correlation but the price purchased and the holding period and the country.

Greece has had recent credit downgrades and the ECB has made it clear they will not bailout member states.  The new Greek government has made cuts in its budget to address its mounting deficit and made a difficult bond placement this last week.  There have been youth riots earlier this year which have abated but various demonstrations are continuing.  Greece will have to make more cuts and it is difficult to determine how social unrest this will create.  It is a country high on our two country watch lists in an older post.

The ECB has made it clear that banks in the 16 nation union, which have already written down 2/3rds of loan losses, may have to write down another 1/3rd in the amount of $267 billion for a total of $796 billion.  The ECB also made several comments about the uneven recovery throughout the economy and from country to country.

Fitch said the US high yield corporate bond default is declining and expects 2010 to decline to 6-7% (average is 4.7%) default.


Empire State Manufacturing index fell 21 points to 2.6; new orders fell 14 points to 2.2; shipments fell 7 points to 6.3; unfilled orders fell 18 points to 21.1, lowest in 9 months; prices paid up 9 points to 19.7 while prices received fell 6.6 to 9.2; employment fell 7 points to 5.3; average work week fell 11 points to 5.3.

Philly Fed manufacturing index up to 20.4 from 16.7; prices paid up 19 points to 33.8 while prices received down .3 to1.8; new orders down 8 to 6.5; employment up 7 to 6.3; inventory up 10 to7.4.

ECB made its final tender of 12 months funds to banks($141 billion).

Canadian inflation rate 1% (1/10th % last month).

British retail sales for November down .3 from October but up 3.1% vs year ago; UK prices up 1.9% in November.

US current foreign trade account deficit up 10.3% to $108 billion in Q3 vs Q2.

China industrial production up 19.2% in November; retail sales up 15.8%; consumer prices up but down .9% vs year ago; producer prices down 2.1% vs year ago.

UK banks are voting on whether to abolish checks and require all transactions be by plastic or on-line.

The 3rd largest container shipping company, CMA CGM SA, warned bondholders that bankruptcy is an option if they do not approve plan to allow new lenders first claim on assets --- they want to raise money but need the $570 million current bond holders to modify the bond terms.

Bank of Japan held its interest rate at 1/10th percent.

Mexico S&P rating cut to BBB.

Gross of Pimco has increased the funds cash holdings to the highest level since the Lehman collapse from <7%> to 7% and reduced government securities from 63% to 51%.

Greenspan (Mr. Asset Bubble) said this last week that the stock market rally has negated any need for another "stimulus".  As I have asked previously, how has the weak US dollar carry trade not created a US stock market asset bubble?

TCF Financial TARP warrant auction went at $3/share (expected $1.82-4.89) and netted $9.45 million for the US Treasury.

CapOne credit card charge offs rose to 9.6 from 9.11; Discover rose to 8.98 from 8.54.

Home buyers are less likely to buy foreclosed properties than 6 months ago citing hidden costs according to a Harris Interactive survey.

Moody's issued an analysis in which they indicated they expect long-term rates may increase more rapidly than expected; that Aaa rated governments will probably not have the luxury of waiting for recovery before implementing fiscal consolidation plans; and Brazil, India, Russia, and China are unlikely to replace large Aaa rated countries as anchors to the global financial system anytime soon.

The US House of Representatives passed a plug the hole "stimulus" to basically throw life preservers to the states in the amount of $155 billion with 48.3 for infrastructure projects that put people to work by April 2010, 27.5 highway, 8.46 transit systems, 23 to pay teachers and repair schools, 1.2 to pay 5500 police, and 23 for the state's share of health care for the poor.  The bill also would extend Cobra 3 months to 15 and extend expiring year end unemployment benefits 6 months.





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IRS Comps Citi

In an IRS ruling this week, prior to the Citi Stock offering, Citi will be allowed to keep approximately $38 billion dollars in deferred losses when the government sells its shares.  In direct contradiction to a law passed earlier this year which reversed a ruling benefiting Wells Fargo and specifically restricted the ability of the IRS to make further changes in the Internal Revenue Code by ruling, the IRS ruling allows Citi to be exempt from the law which prohibits the use of past losses if a company changes hands in order to discourage profitable companies from buying unprofitable companies to avoid taxes.  This is lost money to the government when lower revenue is 56% of the current deficit.

The Citi stock offering subsequently failed miserably pricing in at $3.15 a share only after the underwriter stepped in and bought stock to keep the price from going below $3.  Consequently, the government did not sell part of their 34% holdings as planned, because their basis is $3.25.  Treasury will not sell any Citi stock now for at least 90 days.  The Bank of America stock offering was marginal, particularly given their determination to make no break from the way they have done business as evidenced by their refusal to consider a CEO successor from outside who would have made necessary changes.  Still, Citi's stock offering failure only reaffirms the true Zombie nature of their company.

Of course, Congress will investigate the IRS ruling, but the subcommittee is chaired by Rep. Kucinich who asks the hard questions but has no real respect from his lobbyist indebted fellow members of Congress.


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Obama & Wall Street Controversy

In an earlier post I touched on Matt Taibbi's Obama & Wall Street article in which he attempts to show Obama is controlled by Wall Street.  His basic argument is that Obama relied upon people he knew and those people had their own agenda based on their work associations or, perhaps, as a result of their cultural biases.  Just because you know a member of the elitist class does not mean you can trust their judgment.  Yet, we are constantly being told if you have not been part of the problem you are not qualified to solve the problem.  Imagine what The President's advisers must tell him.

Consequently, I think it is important that you view the links in this post to get a perspective on how facts spin.

Here is an overview of the controversy from Harper's.  Here is the reaction to Taibbi's article by Tim Fernholz.  Here is Salmon's criticism of Fernholz.  Of course, Fernholz continued to react in clarification.

Personally, I think Obama has been played and used and it is now a matter of does he know it and what is he going to do about it.  Brad Delong provides a good nutshell analysis.

Any book, any article in a magazine or news paper, any article on the internet has to be approached with a critical analysis.  The failure to assess information methodologically is the road to poor judgment and false beliefs.


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Laws: Banks Don't Need Laws

It just keeps getting worse.

The Basel Committee has new international bank accounting rules scheduled for 2012, but this week they announced they are considering allowing banks a transition period of ten to twenty years to implement,  The rules would require an 8%  minimum capital ratio and stricter definition of core capital.  Remember Lehman had a Tier 1 ratio of 11% when it failed.

The FDIC is going to create a permanent safe harbor for securitizations and participations existing prior to March 31, 2010 and will consider how to treat new ones created after March 31, 2010.  This effectively removes the banks from putting over $1 trillion of off balance sheet holdings and securitizations at market value rather than par on their balance sheets.  This defeats the FASB rules scheduled to take effect 2010.

The President of the United States summoned bankers to a meeting and Goldman Sachs, J. P Morgan, and Citigroup had more important things to do than meet with the President of the United States and discuss what lending is necessary to create a sustained recovery with jobs.  They have key people in the Treasury and economic policy positions (Geithner and Larry Summers to name just two) in the government and they do not have to listen to the President.

The bankers have given lip service to financial reform, but their lobbyists have defeated and built a false facade in the House bill.  In fact the banks publicly view any attempt at regulation to be a direct threat to liquidity and the stability of interest rates, which is an argument which depends upon the poor education of the public as their real purpose is to protect high risk (and very profitable) trading and investments while they hoard money for cash reserves to bolster their capital ratios, escape TARP, and resume business as usual with renewed grotesque bonuses.  A good description of the bank's political agenda and lobbyist strategy is in a post by Yves Smith on naked capitalist.

How have banks survived the crisis?  We have all been exposed to the Financial Crisis and the necessity to rescue the banks at the expense of common citizen's retirement, savings, homes, and jobs and the victory of recovery and jobless prosperity.  However, the United Nations Office on Drugs and Crime has evidence that the only liquid investment capital banks on the brink of collapse last year had was proceeds from organized crime.  Gang money was used to save some banks when lending seized up.  Drug money funded inter-bank loans.  While these may have been marginal to Central Bank actions, marginal makes a big difference in the banking industry.  Are we to be surprised by the connections between organized crime and drug cartels with banks given the amount of money involved?  The complete Guardian article is here.

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Countries to Watch

In talking about Dubai on the last radio show, I briefly mentioned a few other countries.  I also questioned whether the strong US dollar last week was, rather than a possible bottoming as other analyst have speculated, was the result of seeking a safe haven from sovereign default.  This week with the welcome but inadequate $10 billion from Abu Dhabi to Dubai, the market "sighed relief " and the US dollar reverted to being weaker.  Was I right?

Moody's Misery Index listed countries with public debt in relation to sovereign default risk in descending order or risk: Spain, Latvia, Lithuania, Ireland, Greece, United Kingdom, Iceland, United States, Jamaica, France, Estonia, Portugal, Hungary, Germany, Italy, and the Czech Republic.  Take note of number 6 and number 8 on the list.

The 6th largest Austrian Bank, Hypo Group Alpe Adria, was was nationalized by the Austrian government as insolvent with 40 billion Euros in assets at the insistence of the ECB's chairman Trichet.  The  bank is a subsidiary of the German bank, Bavaria BayernLB, which had reported losses of over 1 billion Euros for the second quarter in a row from HGAA.  Austrian banks have been the subject of how much exposure they have to lending in weak Eastern European countries and some analysts consider German banks fragile as the result of reckless lending seeking high returns.  Credit Writedowns has an excellent article on the nationalization of HGPP and its relation to what is going on in Austria, Germany, Eastern Europe, and Dubai.  Sweden and Poland also have large exposure to Eastern Europe.

CMA DataVision has issued a Q4 report on the Global of countries by percentage of risk for sovereign default based on CDS prices.  It is a multi-page report but here is page 13 with a listing of countries by percentage probability of default.  The top ten are Venezuela, Ukraine, Argentina, Latvia, Iceland, Dubai, Lithuania, Romania, Lebanon, and Greece.  It should be noted that Greece has started to take serious action to curtail spending and has about a year to get its debt and budget under control.  It will be interesting to see if the public demonstrations by young people in Greece will moderate or increase.  Spain has serious economic contraction and, while the economy appears to be picking up in Italy, there have been reports of right wing reactions, particularly against immigrants.




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