The holiday week volatility carried over into Monday with a mixed market and closes well below the highs.
The Dow and S&P rose slowly in the morning but failed at downtrend resistance once again. The S&P managed to close positive with a 2-point gain but the Dow was slightly negative. The S&P hit 2,432 intraday but dropped back 5 points at the close. The trading was on low volume of 5.6 billion shares with advancers and decliners almost even. There was no excitement.
With Janet Yellen speaking three times on Wed/Thr traders do not want to add a lot of long positions after she has warned on overvalued equities several times in the last two weeks. Nobody wants to see a repeat of the Greenspan speech where he warned of "irrational exuberance" in December 1996 and tanked the market. When the Fed is warning on stock prices, it is best to avoid high profile speeches.
The Dow has been trading across 21,400 for three weeks. For some reason that level has become a price magnet and the index keeps returning to that level. You can see from the individual results of the Dow stocks in the table below, there was no excitement. The majority posted only minor moves.
The Dow chart is neither bullish or bearish but does have a slight bullish bias. It has held its recent gains and remains within striking distance of a new high. The intraday volatility over the last three weeks is similar to what is seen at market tops and bottoms. However, consolidation patterns sometimes exhibit the same volatility. Hopefully, the Dow is consolidating ahead of earnings and the next move will be higher but there are no specific signs of that being the case. We have to wait for a move over 21,500 as evidence of a continued rally.
The Nasdaq continued its rebound to resistance at 6,175 and closed only 1 point over that level. Any gain on Tuesday could break free of that resistance and target the next level at 6,242. The big cap tech stocks were all positive and that helped lift the Nasdaq Composite to a 23-point gain and the Nasdaq 100 to a 38-point gain.
The chip sector was leading again with Nvidia adding 7 points.
The Russell is trading in a tight 25-point range just below its highs. The rebound in the financial sector is providing support. The Russell is not directional but as long as it holds near the recent highs there is always the chance for a breakout.
The calendar is highlighted by the Yellen appearances and everything else is just filler. She has the potential to either lift the markets or push them lower.
The earnings calendar is weighted towards Friday when the big three banks report earnings. That could be a market mover for Friday but strong earnings expectations are already priced into the market.
I am cautious about this week. Traders should be positioning for the Q2 earnings cycle that begins on Friday and last for four weeks. Current expectations are for 6+ growth and the early quarter forecast is normally about 3% low. That would mean we should end the cycle around 10% growth.
There is risk for an early exit from the cycle because August and September are normally the worst two months of the year. Since historical trends have been ignored recently, we need to get closer to August to see how the market is going to react. If it appears the republicans are going to move forward on tax reform, the seasonal cycles may be ignored. If it appears they are going to let it slip until Q4, we could see those cycles worsen.
Enter passively, exit aggressively.
Send Jim an email
NEW DIRECTIONAL CALL PLAY
ADBE - Adobe Systems - Company Profile
Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.
Adobe reported earnings of 81 cents that beat estimates by 4 cents. Revenue of $1.77 billion increased sequentially by 5.4% and 26.7% over the year ago quarter. Analysts expected $1.73 billion. Subscriptions accounted for 84% of Q2 revenues, up 36.9% from the year ago quarter. Revenues from digital media solutions rose 29% to $1.21 billion. Annualized recurring revenue rose $312 million to $4.56 billion. Mobile data transactions rose to 57% or all transactions.
Adobe is firing on all cylinders. They ended the quarter with $4.93 billion in cash and $901 million in receivables. They guided for the current quarter to revenue of $1.815 billion and that exceeded estimates for $1.80 billion. They guided for earnings of 72 cents to $1 and analysts were expecting 79 cents.
Expected earnings Sept 19th.
Shares had been in a solid uptrend until the recent Nasdaq decline. Unfortunately, options are expensive so this will have to be a spread.
I try not to recommend a stock in one newsletter than I am also recommending in a different newsletter. In this case, Adobe had the farthest earnings date and allowed us to avoid all the July earnings reports from other stocks. Plus this is a short-term position rather than long term.
Buy Oct $150 call, currently $4.75, initial stop loss $140.85.
Sell short Oct $165 call, currently $1.00, initial stop loss $140.85.
Net debit $3.75.
If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.
Send Jim an email
Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.
Current Position Changes
VAR - Varian Medical
The long call position was entered at the open on Monday.
FB - Facebook
The long call position was re-entered at the open on Monday.
THO - Thor Industries
The long call position was re-entered at the open on Monday.
COST - Costco
The long call position was stopped at $154.50.
Original Play Recommendations (Alpha by Symbol)
COMM - Commscope Holdings - Company Profile
No specific news. Shares held up well for a Nasdaq stock but they are not rising. Earnings are August 3rd and this is an August option. I am recommending we close the position now.
Original Trade Description: May 8th.
CommScope Holding Company, Inc. provides infrastructure solutions for communications networks worldwide. The company's CommScope Connectivity Solutions segment offers optical fiber and twisted pair structured cable solutions, intelligent infrastructure software, and network rack and cabinet enclosures under the SYSTIMAX, AMP NETCONNECT, and Uniprise brands; and fiber management systems, patch cords and panels, complete cabling systems, and cable assemblies for use in offices and data centers. This segment also provides fiber optic connectivity solutions, including hardened connector systems, fiber distribution hubs and management systems, couplers and splitters, plug and play multiport service terminals, hardened optical terminating enclosures, high density cable assemblies, splices, and splice closures that supports video, voice, and high-speed data services provided by telecommunications operators and multi-system operators. Its CommScope Mobility Solutions segment offers macro cell site solutions for wireless tower sites and on rooftops, such as base station antennas, microwave antennas, hybrid fiber-feeder and power cables, coaxial cables, connectors, and filters; metro cell solutions for outdoors on street poles and on other urban structures comprising radio frequency delivery and connectivity solutions, equipment housing, and concealment; and small cell and distributed antenna system (DAS) solutions consisting of DAS and distributed cell solutions that allow wireless operators to enhance efficiency, and cellular coverage and capacity in network conditions. This segment provides its solutions under the Andrew brand. CommScope Holding Company, Inc. sells its products through a network of distributors, system integrators, and resellers. The company was formerly known as Cedar I Holding Company, Inc. Company description from FinViz.com
Commscope reported earnings of 52 cents compared to estimates for 53 cents. Revenue of $1.14 billion matched street estimates. They guided for the current quarter for earnings of 62-67 cents and revenue from $1.20 to $1.25 billion. Full year earnings are expected to be $2.70-$2.80 with revenue $4.85-$4.95 billion.
The earnings were ok, the guidance was a killer. Analysts were expecting $2.95 and $5.1 billion. Shares fell from $41 to $33. Management blamed the miss on "more cautious spending patterns" at North American telecom customers. They are also experiencing some merger pains from their 2015 acquisition of TE Connectivity, which they said they were addressing aggressively. The TE products were lower margin products.
Despite the negativity, telecom spending is expected to pickup in the second half of the year.
Earnings August 3rd.
Shares are already rebounding and I believe this is a buying opportunity on a previously strong chart. If I am wrong the option is cheap and we do not have much at risk.
Long August $38 calls @ $1.25, see portfolio graphic for stop loss.
COST - Costco - Company Profile
The rebound on the initial Costco dip finally failed after peaking on Thursday at $161.35. The stock fell $10 from that peak in the last 3 days to stop us out again.
Original Trade Description: June 12th.
Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com
Estimated earnings date August 24th.
Costco shares were crushed from $180 to $156 on the Amazon acquisition bid for Whole Foods. While this could have "some" impact on the grocery sector "if" the acquisition is actually completed, it would be at least 12-18 months before any changes would be made at Whole Foods. Amazon hopes to complete the acquisition in Q4 but multiple analysts and commentators claim the regulatory approvals are going to be a nightmare even through Whole Foods only has 4% market share of groceries in the U.S. They believe if it does close it will be Q1 or even Q2. Assuming the most likely being Q1, there would probably not be any major changes until Q1-2019.
Whole Foods has 460 stores and revenue of $15.8 billion. Costco has 750 and does $123.3 billion in annual revenue. Whatever Amazon does to Whole Foods will have such a minor impact on Costco over the next two years that it will be insignificant. I am recommending we buy this dip because sooner or later investors will come to their senses.
A Raymond James analyst upgraded Costco to outperform on Monday saying, "enough already!" "The Whole Foods acquisition will not materially impact Costco's unique business model and we would be buyers on this weakness."
I considered waiting until Costco rebounded a little more but that will just make our option premiums more expensive. We know Costco is not going out of business and there will be no impact for a long time, if ever. I am recommending we bite the bullet and just buy it at this level.
Closed 7/7/17: Long Oct $168 call @ $4.00. Exit 1.80, -2.20 loss.
FB - Facebook - Company Profile
Facebook rebounded sharply to return to the prior resistance at $154. Earnings are three weeks away. We need a breakout ahead of the event.
Original Trade Description: June 12th.
Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.
Facebook also blew away earnings estimates and they are growing earnings at the fastest rate of any of the FAANG stocks. They have multiple revenue streams and sites like Instagram and WhatsApp that are just starting to accelerate earnings. They said Instagram had reached 50,000 advertisers. Facebook's problem is they do not have enough page views to monetize despite the 1.9 billion users. They have more advertisers than they have space.
Earnings August 2nd.
Facebook was setting new highs last week until Friday's flash crash. The two day decline knocked the stock back from $155.50 to $144.50, and exactly to support from the May 17th bottom. This "should" be the perfect spot to open a new position on FB. The two day decline has deflated the option premiums and once the tech sector begins to rebound, the FAANG stocks should be leaders again because of their earnings growth rates.
Long Aug $155 call @ $4.30, see portfolio graphic for stop loss.
Previously closed 6/29/17: Long Aug $155 call @ $4.45, exit 3.75, -.70 loss.
HAIN - Hain Celestial - Company Profile
The Amazon deal for Whole Foods made the Hain position a lot more interesting. Whole Foods is Hain's largest customer. Amazon can explode Hain's sales or even acquire Hain to further reduce costs and market reach. BMI Capital said at the least it will boost sales and with Engaged Capital (10% stake) demanding the company sell itself, there may be interest in actually doing that. Other potential acquirers include Pepsi, Campbell, Hormel, General Mills, Kraft Heinz, Nestle and Unilever. There is no shortage of candidates that could be sniffing around.
Original Trade Description: March 20th
The Hain Celestial Group, Inc. manufactures, markets, distributes, and sells organic and natural products in the United States, the United Kingdom, Canada, and Europe. Its grocery products include infant formula; infant, toddler, and kids foods; diapers and wipes; rice and grain-based products; flour and baking mixes; breads, hot and cold cereals, pasta, condiments, cooking and culinary oils, granolas, granola bars, and cereal bars; canned, chilled fresh, aseptic, and instant soups; Greek-style yogurt; chilies and packaged grains; and chocolates and nut butters, as well as plant-based beverages and frozen desserts, such as soy, rice, almond, and coconut. The company's grocery products also comprise juices, hot-eating, chilled and frozen desserts, cookies, crackers, gluten-free frozen entrees and bars, frozen pastas and ethnic meals, frozen fruits and vegetables, cut fresh fruits, refrigerated and frozen soy protein meat-alternative products, tofu, seitan and tempeh products, jams, fruit spreads and jelly, honey, marmalade, and other food products. In addition, it provides snack products, such as potato, root vegetable, and other vegetable chips, as well as straws, tortilla chips, whole grain chips, pita chips, puffs, and popcorn; specialty teas, including herbal, green, black, wellness, rooibos, and chai tea lattes; ready-to-drink beverages comprising organic kombucha and chai tea lattes; personal care products consisting of skin, hair and oral care, deodorants, baby care items, acne treatment, body washes, and sunscreens; and poultry and protein products, such as turkey and chicken products. The company sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, and drug and convenience stores in approximately 70 countries worldwide.
Company description from FinViz.com
We played Hain before back in the fall. Basically, they have not filed their quarterly reports since last May because of a review of accounting procedures. They have suffered over the last year and have reportedly spent $20 million in the complete accounting review for years past and a review of their procedures. They are facing class action suits and SEC probes but none of these things will have a lasting impact.
They are facing a new deadline of May for their reports or they will be in default with their lenders. While they will not say when they will file the back reports, they continue to assure investors there was no wrongdoing and these types of corporate autopsies for prior years take time.
They are so undervalued compared to their peers and their historical norms, it is silly not to have a long position. Once they file the reports this will all be behind them.
I am recommending we buy the August $40 call and forget about it. At $2 it is not a lot of money and they could quickly return to the $50s once they file the reports.
Update 6/23/17: After a year of accounting research, HAIN said there was no need to restate earnings. The problems they found were so minor they were not worth the effort. They implemented some additional controls and promoted James Langrock to EVP and CFO. They discussed plans to cut costs by $350 million over the next three years and said they will buy back $250 million in stock.
They also reported earnings of 33 cents that missed estimates for 52 cents. They guided for the current quarter to earnings of 40-43 cents. For the full year they guided for $1.19-$1.22 and revenue of $2.84-$2.86 billion.
Shares were very volatile on Friday with all the headlines in the press release and the CEO's appearance on CNBC. On Monday shares rose $6.4% to $33.63. We have an August $40 call and we actually have a chance of it regaining value. I was hoping for more of a spike on the earnings release but the earnings miss overshadowed the positive news about the restatement. Since there is nothing wrong with the company or the past financials and it was crushed from $57 to $31 on the initial restatement warning, we could see funds begin to buy it again.
Update 7/2/17: After waiting for three months, we finally got lucky. Hain is under attack by Engaged Capital with a 9.9% stake and they are pushing the company to sell itself and to replace 7 of the 8 board members. Shares spiked 8.5% on Friday and probably have farther to go. Engaged has had several successful attacks recently against other companies and even though they are small they are aggressive. Shares popped to $39 and we are holding the $40 strike.
Long Aug $40 call @ $1.97, see portfolio graphic for stop loss.
RH - RH Inc - Company Profile
No specific news. Profit taking finally appeared to drag the stock back from $69 to $59. There was an afternoon rebound on Monday. Let's hope $59 was the bottom.
Original Trade Description: June 12th.
RH, together with its subsidiaries, operates as a retailer in the home furnishings market. The company offers products in various categories, including furniture, lighting, textiles, bathware, decor, outdoor and garden, tableware, and child and teen furnishings. It provides its products through its retail galleries and Source Books, as well as online through rh.com, rhmodern.com, restorationhardware.com, rhbabyandchild.com, rhteen.com, and waterworks.com Websites. As of January 28, 2017, the company operated 85 retail galleries, including 50 legacy galleries, 6 larger format design galleries, 8 next generation design galleries, 1 RH modern gallery, and 5 RH baby and child galleries in the United States and Canada; 15 Waterworks showrooms in the United States and the United Kingdom; and 28 outlet stores. The company was formerly known as Restoration Hardware Holdings, Inc. and changed its name to RH in January 2017. Company description from FinViz.com
RH reported earnings of 5 cents that beat estimates for 4 cents. Revenue of $562.1 million beat estimates for $560.4 million. So far, so good. However, they guided for Q2 earnings of 38-43 cents and analysts were expecting 53-75 cents. No, that is not a misprint.
The company said it was ditching its prior merchandising model and switching to a membership model in order to make the company Amazon proof and enhance the customer experience. They are moving away from the highly promotional retail experience with constant sales and discounts and moving to a membership model where the focus will be on the customer experience. "Members" will pay $100 a year for the ability to shop in a high quality store where they will find only high quality merchandise.
Shares crashed 26% to $42 on the guidance but the rebound has been amazing. Apparently investors like the concept and the idea of a "Costco" model but in high quality products.
Earnings August 31st.
Long August $55 call @ $2.70, see portfolio graphic for stop loss.
THO - Thor Industries- Company Profile
No specific news. Thor dropped further after we reentered last Monday. Support appeared at $101.50 and has held for two days.
Original Trade Description: June 19th.
Thor Industries, Inc., through its subsidiaries, designs, manufactures, and sells recreational vehicles, and related parts and accessories primarily in the United States and Canada. It operates through Towable Recreational Vehicles and Motorized Recreational Vehicles segments. The company offers travel trailers under the Airstream International, Classic Limited, Sport, Flying Cloud, Land Yacht, and Eddie Bauer trade names, as well as Interstate and Autobahn Class B motorhomes; gasoline and diesel Class A and Class C motorhomes under the Four Winds, Hurricane, Chateau, Challenger, Tuscany, Axis, Vegas, Palazzo, Synergy, Quantum, Compass, Gemini, A.C.E, Alante, Precept, Greyhawk, and Redhawk trade names; and fifth wheels under the Redwood and DRV Mobile Suites trade names. It also provides conventional travel trailers and fifth wheels under the Montana, Springdale, Hideout, Sprinter, Outback, Laredo, Alpine, Bullet, Fuzion, Raptor, Passport, Cougar, Coleman, Kodiak, Aspen Trail, Voltage, Cameo, Cruiser, ReZerve, Sunset Trail, Zinger, Landmark, Bighorn, Sundance, Elkridge, Trail Runner, North Trail, Cyclone, Torque, Prowler, Wilderness, Shadow Cruiser, Fun Finder, Stryker, Sportsmen, Spree, Venom, Durango, SportTrek, Connect, Sportster, Sonic, Jay Flight, Jay Feather, Eagle, Pinnacle, Seismic, AR-One, Launch, Autumn Ridge, Travel Star, Highlander, Roamer, and Open Range trade names. In addition, the company offers equestrian recreational vehicle products with living quarters under the Premiere, Silverado, Ranger, Laredo, Trail Boss, and Trail Hand trade names; lightweight travel trailers and specialty products under the Camplite and Quicksilver trade names; and Class A motorhomes under the Insignia, Aspire, Anthem, and Cornerstone trade names, as well as provides aluminum extrusions and specialized component products. Company description from FinViz.com
In a weak economy Thor is kicking butt. The company reported earnings of $2.11 which rose 41.6% compared to estimates for $1.87. Revenue of $2.02 billion rose 57% beat estimates for $1.96 billion. Operating cash flow rose 26.2% and gross profits rose 45.5%.
Sales of towable travel trailers rose 52.6% and sales of motorized RVs rose 78.7%. There was no bad news in the Thor report.
Estimated earnings date September 4th.
With the company posting record earnings the stock spiked from $94 to $104 on June 6th. When the market dipped, shares only pulled back to $102. Over the last week they have returned to $106 and Monday's close was a four-month high.
Winnebago (WGO) reports earnings this week and that is going to remind investors how strong Thor's report really was. I believe we will see Thor break through that post earnings resistance and head back to the highs at $115.
Long Sep $110 call @ $1.90, see portfolio graphic for stop loss.
Previously closed 6/29/17: Long Aug $110 call @ $3.20, exit $1.80, -1.40 loss.
VAR - Varian Medical Systems - Company Profile
No specific news. Shares have traded sideways all last week despite the volatile market. This shows good relative strength.
Original Trade Description: July 2nd.
Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. The company was formerly known as Varian Associates, Inc. and changed its name to Varian Medical Systems, Inc. in April 1999. Varian Medical Systems, Inc. was founded in 1948. Company description from FinViz.com.
Drugs are not the only opportunity to rid yourself of a terrible disease. Varian produces multiple products for discovering and targeting cancer. They are the sector leader in imaging and radiation therapy.
Varian reported Q1 earnings of 89 cents that beat estimates for 88 cents. Revenue of $655 million beat estimates for $643 million. They guided for full year earnings of $3.56-$3.64 per share.
Earnings July 26th.
On May 6th, the company announced a "game-changing treatment platform" to combat the cancer challenge. (their words) The new Halcyon system is an entirely new device that "simplifies and enhances virtually every aspect of image-guided volumetric intensity modulated radiotherapy (IMRT). This new treatment system is designed to expand the availability of high quality cancer care globally and help save the lives of millions more cancer patients." The new system requires only 9 steps compared with the 30 treatment steps required by current generation equipment. "Halcyon is well suited to handle the majority of cancer patients, offering advanced treatments for prostate, breast, head & neck, and many other forms of cancer." Press Release
The company demonstrated the new device to packed crowds at the ESTRO 36 conference in Vienna. Shares spiked $4 on the announcement.
In late May, Varian announced it was going to install its first Proton Therapy System in Thailand. The first one in a country is always the hardest. The order will be booked in this quarter's earnings.
Varian had a nearly $30 gain since January. The market volatility over the last week blunted that rally and given us a buying opportunity. There is decent support at $101.
Long August $105 call @ $2.70, see portfolio graphic for stop loss.
Prices Quoted in Newsletter
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