Dollars and Jens
Friday, January 30, 2004
More than 3000 firms are listed on the NASDAQ. Our data set includes the 489 largest firms; their combined market value was $2,200 billion and their forward earnings are about $50 billion for a price earnings ratio of 45. Five firms - Microsoft, Intel, Cisco, Dell and AmGen - account for nearly 50% of the earnings and one-third of the market cap. The price-earnings ratio for the remaining firms is 56. ... [T]here is no way that the earnings of NASDAQ firms as a group can increase so that the rates of return to the owners of stocks of this group will be higher than the rates of return from buying a US Treasury price level indexed bond.
Thus asserts University of Chicago Economist Robert Aliber, who apparently has a terrible prediction record, but deconstruct his data and his argument.

latest numbers
4.0% 4Q growth. The deflator was at 1.0%. Also, our trading software stood up well under the ensuing onslaught of trades.

Expectations for growth were in the 4.7% to 5.0% range, depending on your source. I thought these numbers sounded high, but I also assume that whoever comes up with them is sythesizing the other numbers coming out into an estimate much better than I am. Maybe I'll speak up in April and see how that goes; if I merely demonstrate my ignorance, it wouldn't be the first time.

More Sanofi/Aventis
Aventis SA Thursday said it aims to fend off a hostile bid launched by smaller rival Sanofi-Synthelabo SA because the offer terms undervalue the Franco-German drug-maker by 30% to 40%.

The gap between the price of Aventis SA shares and their value as implied by a hostile bid from smaller rival Sanofi-Synthelabo SA increased to 5.7% Thursday from 4.5% Wednesday, a sign that investors are betting a higher bid may come.

Sanofi is running an ad targeted at Aventis shareholders in Europe. According to the article, this is illegal in the U.S. If anyone can explain why, I'd love to hear it. Anyway, the ad has a picture of a boy having his blood pressure checked by a med student:
The baseline reads: "Who's going to tell Louis that the drug which will cure him will be ready only in 20 years time? You? No. No one. Our merger with Aventis will allow researchers to take a big step forward, will put new, innovative medicines at the disposal of patients faster."

The ad, which implies that a merger would help cure the boy, also ran in Spain and Switzerland as well as in publications with a pan-European reach. It didn't run in the U.S., where advertising a takeover bid is prohibited, Sanofi's ad firm Publicis SA said.


Sanofi has said it decided to launch the bid Monday because it feared it could itself become a takeover target.


[I]n Germany, home to 9,000 Aventis employees, little Jan is getting Sanofi in trouble.

His appearance on newspaper pages Wednesday has prompted several complaints filed to the country's Advertising Council, said Germany's Nickel. He declined to say who had filed the complaints but said they all focused on the moral aspect of the campaign.

One complaint says the ad put the "emotional gun" on audiences' chest.

The ad council passed on the file to Germany's Competition Commission to look into whether Sanofi had the right to imply that taking over Aventis would help shorten research delays and foster innovation. The commission deals with unfair competition and has sent a letter to Sanofi, urging the French company to stop the ads.


In France, where the government has expressed support for the bid, the ad industry watchdog Bureau de Verification de la Publicite said the Sanofi's ad didn't breach local regulations because Louis stopped short of directly recommending the bid.

"On French highways, when you drive at 130 km/h, you're at the maximum authorized speed, but you're not breaking the law," said a person familiar with the BVP's thinking, requesting anonymity.

Both Sanofi and Publicis are members of the BVP.
I'm curious how this French law reads, that would make it illegal for "Louis" to expressly advocate selling, but that isn't otherwise broken. For now, I'll just assume that they're all full of it.

Meanwhile, someone has convinced the German Economic Minister that no German researchers at Aventis would lose their jobs. Well, as Derek Lowe points out, someone, somewhere, is likely to lose a job -- that's a lot of the point of merging companies.

And last, but certainly not least, Novartis is considering bidding for Aventis.

Wednesday, January 28, 2004
The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.
Rates, as expected, are unchanged.

Eurex US
Eurex has finally 'fessed up that their new Eurex US launch won't take place next Sunday, but is now hoping to open the next week. They still don't have approval from the CFTC, which will be meeting next Wednesday to consider it.

The betting pool still says March.

Update: This might be a better story on the situation, or at least one told from a more neutral viewpoint.

Eurex is the world's largest derivatives exchange, as asserted in the press release; it is an entirely electronic exchange trading options and futures in Frankfurt, Germany, with underliers of primarily European and especially German interest, such as German government debt and the DAX (the index used by the Frankfurt stock exchange). Eurex US is to be located in Chicago, and, more to the point, to be governed by U.S. regulations and trade U.S. government debt derivatives, thereby providing much greater competition to the Board of Trade. This was announced, in fact, shortly after the Board of Trade decided to move away from the Eurex-built electronic trading platform it had been using for its own electronic trading.

The CFTC, by the way, is the Commodity Trading Futures Commission, the government commission that regulated futures trading in the United States, whether Commodity-derived or not. In fact, they regulate the Iowa Electronic Markets, believe it or not.

Tuesday, January 27, 2004
More Sanofi/Aventis Fun
We're not sick of Sanofi/Aventis news yet, are we? Good:
In a conference call with analysts and reporters, Aventis chief executive Igor Landau said Sanofi was trying to take advantage of his company's superior "critical mass" to offload its own financial risks.

"They want to buy a life insurance policy almost free of charge," he said. "This is their problem, not our problem."


Germany's Handelsblatt business daily reported that Chancellor Gerhard Schroeder plans to contact French President Jacques Chirac on Wednesday about the takeover bid.

Schroeder wants to support Aventis' defense, the report said. A government spokesman in Berlin told The Associated Press on customary condition of anonymity that the report was "speculation."

Berlin fears that Aventis' 9,000 staff in Germany would bear the brunt of the layoffs that would likely follow the hostile merger. The company was formed out of a 2000 merger between France's Rhone-Poulenc Rorer and German drug and chemical company Hoechst.


According to financial daily Les Echos, [Sanofi CEO Jean-François] Dehecq did not seek to rebut a claim by Aventis that the takeover would lead to 10,000-12,000 job cuts.

"And if it was Glaxo, that would be how many?" he was quoted as saying.

Market watchers say GlaxoSmithKline is the most likely candidate for a "white knight" rescue bid for Aventis -- a possibility that the French company itself does not rule out.

"I'm convinced there are a number of other potential combinations that would position us much more strongly ... than a combination with Sanofi," Landau said in the conference call.

Five Japanese have died after taking an arthritis drug produced by pharmaceutical giant Aventis and the company said it has warned doctors against prescribing it to patients with respiratory problems.

It has not been confirmed whether the drug, Arava, caused the deaths, but doctors in two cases believe the medication may have been responsible, said Yota Kikuchi, a spokesman at the Franco-German company’s Tokyo-based subsidiary, Aventis Pharma Japan.
Good timing. Apparently, though, the drug isn't a huge portion of Aventis's sales.

More on Sanofi
Following yesterday's big news, today's Wall Street Journal has a profile of the CEO of Sanofi, Jean-Francois Dehecq:
Today [Plavix] is Sanofi's second-biggest earner, and could rake in €6 billion in sales in 2006, analysts estimate. According to Andrew Pendrill, an analyst in London for ABN Amro, Plavix, which is marketed in the U.S. by Bristol-Myers, represents €15 of the €50 share price for Sanofi in recent weeks.

Some analysts speculate that the potential early loss of the Plavix patent, which is being challenged in a U.S. court, may have prompted Sanofi's run at Aventis. Mr. Dehecq disagrees. "You don't launch operations of this type based on the timing of things you don't control," he says.
I think that's the dumbest statement I've heard in the last week from somebody not running for president.

Monday, January 26, 2004
Pharma News
There were three stories I found interesting in the world of drugs today, two of them about Eli Lilly.

The patent for Lilly's top-selling drug Zyprexa (olanzapine) is being challenged in court:
Three generic drug manufacturers are seeking to have declared invalid Lilly's patent on Zyprexa, an anti-psychotic introduced in 1996 to treat schizophrenia that has sales of about $4 billion a year.

The companies challenging the patent argue that discovery of the drug's molecular structure was obvious and that a previous Lilly patent covered it. The companies also claim that Lilly mislead the patent office and omitted certain test results when applying for the patent.
This is on top of the fact that a couple months ago Eli Lilly released results of a study indicating that Zyprexa isn't any better than generic haloperidol. (Thanks to drug researcher Derek Lowe for the tip.)

On the bright side, Cialis (tadalafil) is selling well, and its owners (Lilly and ICOS) are going to advertise during the coming weekend's football game:
It's a first in an advertising category that has been characterized by sexual innuendo, insinuation and allusion: a new television commercial for erectile dysfunction drug Cialis debuting during the Super Bowl actually states what condition the medication treats.

Frankness was necessary to highlight what Cialis' makers call a major advantage over its two competitors: It lasts for up to 36 hours. Rival products expire after roughly four hours.
Finally, there's a hostile-to-management take-over bid for Aventis by smaller French drug company Sanofi-Synthelabo. The bid was something less than 5% higher than Aventis's market price, which seems small to me (especially for a hostile-to-management bid), but maybe Sanofi thinks it can convince Aventis shareholders that there are real synergies -- the transaction would be about 80% stock. Derek Lowe has thoughts, starting along the lines of "why is Sanofi's management so eager to trade its company's shares for something else?" Hmm.

UPDATE: Actually, after today's trading, the value of the bid is less than the value of Aventis, which suggests that Lowe isn't the only person thinking "bidding war". Also interesting: according to the Wall Street Journal, Sanofi is roughly one-third controlled by TotalFinaElf -- if we're lucky, that scandal will come into play. Actually, let me quote a few paragraphs from the Journal:
But Prime Minister Jean-Pierre Raffarin joined a growing chorus of French leaders expressing support for the takeover. In a warning that foreign companies should think twice before joining the takeover fray, Mr. Raffarin said he was "very attentive" to developments surrounding the deal and backed the creation of "big champions" in corporate France. Sanofi is based in Paris and Aventis is based in Strasbourg.


Sanofi's original €60.43-a-share bid represented a premium of 5% to Aventis's closing stock price of €57.55 on Friday -- although Sanofi was quick to point out that Aventis's shares have risen substantially in recent weeks amid merger speculation. Mr. Dehecq said his bid represented a 13.9% premium to the Aventis share price of Jan. 21, before the sharp speculative rise. And, at a meeting with analysts in London, he played down suggestions that the offer was too low. "Some say it is not enough -- that is normal," he said.

One big wild card is Kuwait Petroleum Corp., Kuwait's state-owned oil company, which holds a 13.5% stake in Aventis. The Kuwaiti company has said it no longer considers the Aventis stake a core holding, and it has been looking for a buyer for the shares. It isn't clear yet how the oil company views the Sanofi bid. A Kuwait Petroleum spokesman declined to comment.


Asked about the timing of the bid, Mr. Dehecq said the expiration of a key Sanofi shareholders' pact between L'Oreal SA and Total SA at year's end would leave Sanofi exposed to a takeover if it doesn't bulk up. That pact has kept the two top holders from selling their stakes in Sanofi. "The appetite of predators will be immense. If you don't want to submit, you have to anticipate," he said. "I wouldn't be doing my job as CEO if I didn't anticipate."
In conclusion, this may be more political than it is economic, and it may get a lot more interesting before the dust settles.

Dow at 31 month high
The Dow Industrials closed at their highest level since before 9/11.

Friday, January 23, 2004
Berkshire Hathaway
Berkshire Hathaway stock crossed $90,000 today. Should have bought at $11 in the sixties.

Thursday, January 22, 2004
latest numbers
It may be that two guys in Chatanooga and I are the only people who actually care about the initial claims number, what with its volatility, but care we do, and this morning it came in at 341,000.

Wednesday, January 21, 2004
AT&T Wireless Reportedly Will Weigh Acquisition Interest
The board of AT&T Wireless Services Inc. will hear about several expressions of interest the company has received from other carriers involving a possible acquisition or merger at its board meeting Tuesday, people familiar with the situation told The Wall Street Journal.
News of interest by Cingular broke first, but Nextel, Vodafone, and NTT DoCoMo have expressed interest as well, according to the story.

Saturday, January 17, 2004
Judge Denies Gillette on Injunction Against Schick
Gillette Co.'s patent suit against rival Schick-Wilkinson Sword was dealt a sharp blow from a federal judge in Boston, who ruled Thursday that the razor giant's patent suit seeking to block Schick from selling its four- bladed Quattro razor has "no reasonable likelihood of success" on its infringement claim.

In the ruling, U.S. District Judge Patti B. Saris denied Gillette's request for a preliminary injunction that could pull Quattro from the market. Quattro hit store shelves in September. The decision doesn't mean the end of the case; Gillette says it intends to follow it through to trial.

...The patent referred to three blades, but Gillette lawyers argued that the patent's language didn't restrict it to only three blades.

Judge Saris appeared not to buy that line of reasoning. "No amount of creative numbering ... can avoid the plain language regarding blade configuration in Claim 1 that excludes from its literal scope the possibility that the accused razor unit contain four blades," she wrote in the ruling.

In her ruling, Judge Saris dissected the innards of Gillette's patent, determining in essence that Gillette's use of the word "third" in defining a razor blade nearest one end of the cartridge, and "first" defining a blade nearest the other, precluded that same cartridge from having a fourth blade.

Paul McGowan, a patent attorney and editor in chief of the Litigation Stock Report newsletter, says Gillette could appeal that point to the Federal Circuit, but the process could drag on for a year or two. "It's not a good sign, frankly, " says Mr. McGowan, who has followed the case.

Schick's next move is likely to file a motion for summary judgment asking Judge Saris to rule without a trial, says Scott Marrs, a patent attorney at the Houston firm of Beirne Maynard & Parsons LLP. "They are certainly down but not out," Mr. Marrs says of Gillette. Still, he adds, "this is a significant blow to their case."
In case you read the whole thing, be aware that I skipped some paragraphs in that excerpt.

Friday, January 16, 2004
Cialis (tadalafil), the impotence drug (excuse me -- anti-impotence drug) from Eli Lilly & Co. and ICOS, went on the market in December, but the direct-to-consumer ad campaign has yet to begin. I am, however, already receiving spam trying to sell it to me.

Thursday, January 15, 2004
EU Considers Money Laundering Lawsuit Against Tobacco Cos
The E.U. accused the cigarette makers of intentionally oversupplying countries in eastern Europe, so that the surplus would be smuggled into the 15-nation E.U., resulting in billions of dollars in lost taxes.

This has been tried by cities in the U.S. against gun dealers, hasn't it?

If smugglers move cigarettes from Hungary to Germany, from the perspective of Phillip Morris that will increase demand for cigarettes in Hungary and decrease it in Germany. Is Phillip Morris obligated to discern the reason for demand patterns, to try to outguess the market, and to require smugglers to bid the prices in the two countries together, or does the EU believe that Phillip Morris *is* anticipating the demand shifts created by the smugglers, and thinks they should knock it off and do the same thing in response to market forces as they materialize?

So much of what lawyers do just doesn't even fit into my epistemology.

Gillette introduces new razor
Gillette has found a synergy with its Duracell unit:
Gillette is launching a battery-powered, "pulsating" version of its market-leading Mach3 razor, opening a new front in the battle with rival Schick-Wilkinson Sword for domination of the global razor market.
"Pulsating"? When I put a sharp blade near my face, I like to feel a sense of control.

On the other hand, Remington (a subsidiary of Rayovac) has been selling something like this for years.

I own shares in Berkshire Hathaway, which owns 9% of Gillette.

Washington Mutual auctions off CDs
This looks interesting:
Washington Mutual is teaming up with eBay to make available an unprecedented promotion -- offering certificates of deposit (CDs) via an online auction format. Called the Bid Your Rate promotion, shoppers can begin bidding online starting Jan. 15 through the end of February. The limited offering of these CDs is accessible on a special auction website and is powered by eBay technology.

During the promotion, approximately 600 six-month CDs of $1,000 each will be made available for bidding during a six-week period, with approximately 100 CDs listed each week. Shoppers will be able to bid on the interest rate of their CDs -- with bidding starting at higher interest rates, and subsequent bids bringing down the interest rate until the auction listing closes. If the final bid meets an undisclosed reserve, the successful bidder is expected to get a competitive interest rate on his or her CD.
FYI, I own shares of WaMu.

Wednesday, January 14, 2004
JPM to buy Bank One; Intel reports record quarter
Business headlines:
Shares of financial giant J.P. Morgan Chase & Co. also fell about 4 percent after it said it had agreed to buy rival Bank One Corp. for about $60 billion. Bank One shares soared 10 percent.

Intel, the world's biggest microchip maker, fell after it reported a sharp rise in quarterly revenue and a higher profit, but forecast a drop in revenues in the first quarter. Its shares fell to $32.59 on the Instinet electronic brokerage system from $33.39 at its close in regular trade on Nasdaq.
I imagine somebody has an idea of what expectations are for INTC; it could well be priced for higher expectations than are achievable. (That's hedged almost to the point of meaninglessness, isn't it.)

busted trades
Someone who knows more than I has suggested that likely someone entered a market sell at the same moment as the bids happened to dry up. Most likely, also, the best bid was a customer, rather than a member of the board of trade; if it was a member, they'd likely let the trade stand, but have fewer qualms about screwing a customer.

He points out that CBOT is still primarily an open-outcry exchange, and if a trader goes to the floor to do a market sell, it's actually visible to the other traders for a finite period of time — a few seconds, say — before it executes. If the bids have momentarily dropped away, they will come back in response to a market sell. There may be a sense, then, that for members to have missed such an opportunity because the electronic execution is immediate "isn't fair". Someday maybe the traders will grow up and learn that if you mean "sell at no worse than $420", you should say that instead of "sell at any price", and that if you don't you should be taken at your word.

busted trades
Some trades on the Chicago Board of Trade's electronic system were busted last night. Gold future trades executing with prices below $420 a bit after 3 this morning (central time) were negated. Markets will sometimes be halted on news, but trades don't generally get busted unless something technical has gone wrong; I have no more details than what I'm providing, and have trouble imagining what would have happened electronically to result in a bust; I don't know whether a large order accidentally entered to sell at $42 would be viewed as grounds for a bust or not.

latest numbers
PPI at .3% vs. .2% consensus, core at -.1% vs. .1%.

Tuesday, January 13, 2004
Doom and gloom
It's in my nature to, as Marty Zweig says, "always be worried", and whether I'm quite convinced the world is going to end or not, it's worth noting the case in favor as presented by MSN.

Doom and gloom article 1, in which a director of a silver company shills for precious metals:
Folks are either leveraged to the hilt in housing or real estate investments, and/or they are piling into stocks. In both cases, the rationalization is some variation of the greater-fool theory.
I don't believe that. Certainly not for housing, where most buyers have no intention of flipping to the next buyer; most homebuyers are buying a home as much as an investment. I also think that most stock-buyers are thinking in terms of the economy and earnings growth these days, and not just that the market is going up. There are still, I'm sure, investors who haven't thought about why a stock has value, but I don't think a lot of the people who have are deliberately buying overvalued stocks at this point.

Doom and gloom article 2 concerns consumer debt.
Although the credit card industry says average household consumer debt comes to $9,000, Manning said, it is actually closer to $13,000 when the roughly 40 percent of households that pay their balances each month are taken out of the equation.
I bet it's over $20,000 if you exclude the households that carry less than $20,000.

Incidentally, any time I see reports of loans at "800% interest rates" I'm fully convinced that there's some misleading taking place here. These are usually very short-term loans with an origination (paperwork) fee that turns out to exceed the interest on the loan, and somebody with an agenda wants to call the paperwork fee "interest". Money intended to be charged as interest can be moved to items like this, but there are reasons for items like this to exist aside from evasion of usury laws, and until we're going after the government for charging sales tax on the lunch I'm going to consume right after buying it — 40 cents on a $5 meal in only 30 minutes, that's 140,000% interest! — it's not quite fair to pretend otherwise. Tell me a $150 fee is being assessed on a $500 loan and I'll be impressed, but divide it by the length of the loan and hide the raw data and I feel obligated to ignore anything you say.

Monday, January 12, 2004
As goes the first week, so goes the year?
Page C-1 of today's Wall Street Journal has a graphic indicating how the market has done over the last half-century or so in years where the first week is up (up an average of 13.8%) vs. years in which the first week is down (up an average of 1.9%). Wouldn't it be more interesting, though, to know what the market does in the rest of the year, rather than in the entire year (including the first week)?

dual listing
Dual listing will take place of the stocks of Hewlett-Packard, Charles Schwab, Walgreen's, Apache, Countrywide Financial, and something called Cadence Design Systems. (HPQ, SCH, WAG, APA, CFC, CDN.)

Neil Cavuto - Who Says Eliot Spitzer Is a Hero?
Neil Cavuto isn't a fan of Eliot Spitzer. I have to say that I'm not, either.

My view of Eliot Spitzer is that he's the sort of politician the founding fathers envisioned. They did their best to set things up such that an ambitious, hard-working, grandstanding, intelligent bastard would do more good than harm. And it's just possible that Eliot Spitzer actually has.

Friday, January 09, 2004
dual listing
Rumors are spreading that Nasdaq is seeking to get NYSE companies to list on the Nasdaq as well as the NYSE, rather than trying to get them to abandon the more prestigious exchange altogether.

latest numbers
Unemployment rate down to 5.7%, but payrolls up only 1,000 jobs, with November revised down from 57 to 43, and the futures are going nuts. Bond futures took off, equity futures are down, and I heard one (bond future) trader comment to some others, "run away".

Thursday, January 08, 2004
latest numbers
353,000 initial claims of unemployment.

Wednesday, January 07, 2004
Verizon saves Nortel
The headline is "Verizon Selects Nortel Networks to Accelerate Building of Nation's Largest Converged, Packet-Switched Wireline Network Using Voice-Over-IP Technology", but I think it's interesting mostly because this happened to the stock of a company you've heard of. Those big moves up tend not to be made by companies in Nortel's demographic, do they?

(Also interesting is the movement preceding the announcement. Is insider trading illegal in Canada?)

Monday, January 05, 2004
mad cow II
I asked how mad cow benefits beef restaurants; it seems the idea is that foreign demand is driven down much more than domestic demand. The restaurants are between domestic consumers and U.S. beef, but not so much between foreign consumers and U.S. beef, so they benefit from the substitution of American consumers for foreign ones.

Friday, January 02, 2004
The value of branding
There's some complaining over at the Kitchen Cabinet about consumer service, and I'd like to stand up for the gung-ho capitalist position here. Because Dell got some complaints, I want to point out that Dell is well-regarded in the business world, and, if it weren't, it wouldn't be generating the returns on equity it does. When customers have bad experiences, it hurts the company, largely because people like me who hear the stories and are looking for computers will be less likely to buy from them, particularly at a high price.

When Kate previously wrote about her experience, she complained that
I can stop buying their products, but this doesn't mean anything to them. I am just one measly consumer among hundreds of thousands. I can tell my friends. I can just imagine their response: "Oh really? How many friends do you have?"
This is true; so was her experience a commensurately small part of the company. It is as these stories multiply that the brand name should and does deteriorate; Kate no more gets to dictate 10% of Dell's bottom line than do 100,000 Angry Left protestors get to monopolize public discourse on foreign policy, much to their similar seeming frustration.

Smaller businesses are dicier, but many of them do rely on repeat business. That so many small companies fail is attributable to the difficulty in getting enough people to build trust in the company, to take a chance and tell friends about positive experiences, for it to become profitable before it runs out of its start-up money. There is an information problem here, and the entrepreneurs pay some of the cost of solving it, while the customers willing to give a new place a chance pay the rest. People I know go to one of a certain set of places for lunch each day; I would expect that most regular soliciters of dry-cleaning services have regular places they solicit. At one time there was a first time, and they took a chance; sometimes that chance goes badly. Often it does not.

Problems are going to be more noticeable than achievements; we expect things we buy to work, and we expect to get services for which we spend our money. That the exceptions are memorable is human nature, as is to complain about them. Indeed, it may even be productive, provided that we remember that these are exceptions; most of the time, the market works better in practice than even in theory.

market anthropomorphization
Bonds are down on the lack of terrorism, and I'd like to take the opportunity to complain (I never miss an opportunity to complain, do I?) about the tendency to associate rising asset prices with happiness, cheer, optimism, and even charity, and falling asset prices with the opposite. Take our beloved Louis Rukeyser's term "bond ghouls"; he realizes that bond prices go up on bad news and down on good news, and the inference is not that, well, maybe bad news makes bonds more valuable, but that bond traders are taking glee in misery and are disappointed by prosperity.

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