- Stress test medicine is painless, jobs report within tolerance, stocks rally again.
- NASDAQ gains ground but techs are struggling. After the stress test and jobs report the financials need to find more near term buyers.
- Massive liquidity, 'chase money' fueling the stock market rally, but a poor bond auction and bond rates forecast the problems ahead.
- A lot of enthusiasm over poor economic data versus a lot of pessimism over truly improving economic data.
- Liquidity means more stock market gains but near term techs have to prove themselves again and financials have to continue to lead.
Stress test, jobs report no obstacle to a further rally.
Financial institutions that did not 'pass' the stress test, 9 of the 19, are engaged in the next rush, the rush to raise their own capital, non-government assisted, so they can cast off the TARP. The Treasury surprised us all this week when it announced that any institution could repay the TARP and throw down the government yoke when it can raise needed capital without the government backing. Thus a lot of bond issuances were announced Friday. Banks that were basically forced at gunpoint to take the funds are showing how much they detest the governmental interference.
The jobs report was also quite palatable at -539K versus the 610K officially expected, though the whisper was in the -550K range. March was revised to -699K, however, so the April number was really at expectations. That was not worse than expected, however, so that was enough to keep things going. Of course the unemployment rate hit 8.9%, already topping the Administration's estimates on the peak for this downturn. Moreover, the improvement in the overall number was due to growth in the federal government with the hiring of census workers. Now THAT is real improvement in the jobs picture. The real story is in the temp workers. Temp workers are the first to get hired in a recovery as companies gingerly get back into hiring. If things work out they make those temps permanent offers. At +68K temp hiring is still very anemic, indicating no improvement in hiring. That is nothing unusual. The economic numbers, as discussed below, are still pathetic and you would expect hiring, a lagging indicator, to remain muted at this point. It is.
Nothing was stopping the move higher, however. There are reasons for that as discussed the past week and later in this report, but it was not all upside. Stocks again gapped higher but that move did not hold and NASDAQ was negative by midmorning. At that point, however, the buyers moved back in and it was upside for the rest of the session with stocks rising back to the morning highs and beyond, at least on SP500 (+2.41%). SOX closed down almost 2%. NASDAQ 100 scratched out a 0.3% gain. Gains again but there are some cracks. Of course thus far cracks have been filled by liquidity.
TECHNICAL. Intraday a gap higher, a test midmorning, and then a move higher into the close that once again ended with gains. Eight straight weeks higher for NASDAQ, 7 of 8 for SP500. Same old story.
INTERNALS. Solid to the upside once more with 3:1 advancers on NASDAQ and 5.5:1 on NYSE. Volume was lower but still huge on NASDAQ (3B) and it was no slouch on NYSE. Volume is pouring in since Wednesday. Is it good volume? NASDAQ showed churn on Tuesday and really on Wednesday, and Thursday NASDAQ was down on the strongest volume since November. Strong volume is the most telling volume. On NASDAQ it is showing distributive action, and with SOX failing its breakout this volume is setting up an important inflection point for this rally this coming week. NYSE is running higher on the strength of financials and also the liquidity run in commodities and industrials.
CHARTS. SP500 broke to a new post-March closing high, clearing the December twin peaks at 319. Still below the January peak at 944 and the closing January high at 935, but showing no signs of wear and tear as the financials continue to move higher as money chases them. Of course when they are getting money for free and can invest it in the market, money should chase them as it is free money. We are not only giving financials money to shore up their balance sheets, we are subsidizing them with all the free money the Fed has injected into the system that no one wants to borrow and the banks are putting it in the market, driving up prices and making them money. How easy is that?
NASDAQ posted a gain but it was after the Thursday hit down to 1700. Pretty modest rebound though volume remained strong. As noted, volume is an issue for the techs as there is churn and some distribution. NASDAQ looks toppy near term and a test to the mid-April high at 1675 looks easy and 1600ish is more reasonable for this test. SOX was down on an up day and this former leading group and has broken its trendline from March. It held over the November high with a late recovery, but we are looking for a deeper test down toward the 232 level. SP600 (+3.59%) HIT A NEW POST March high as well and is a gnat's butt from the January peak. Strong day for small caps but they are also at two layers of resistance at that January high and the descending 200 day SMA.
LEADERSHIP. Financials. Energy. Industrials. Commodities. Financials are rallying as they can basically print their own money. The other three are rallying on the liquidity explosion via world monetary policy that makes these sectors attractive from both a recovery perspective and an inflation perspective. Techs are struggling with many toppy patterns near term. Chips were hammered. Retail doesn't look very good at all even with the supposedly 'stronger' April same store sales. Overall leadership remains strong, but after such a rush higher there is some typical retrenching by the early leaders. Okay, some are more than retrenching; some are digging trenches. Overall leadership remains in good shape, however.
Fed liquidity is having its impact, but it is not healthy for the longer term.
After making trillions of dollars available in direct loans, guarantees, etc. we are seeing the effect. Money is everywhere but there is a problem. The economy remains weak and there is no incentive to invest in the economy. Despite the trumpeting of the 'shoots' of economic recovery, the economy is in very poor shape. There is no real stimulus to invest in your business as there was in with the second round of economic stimulus under Bush that jolted the economy and resulted in 7.4% GDP growth in Q3 2003, just a couple of quarters after passage. The Obama plan is government spending to states to keep some local government employees at work. And don't let the $17B in cuts announced this week make you think the spending has anyone in DC worried. These are the same spending cuts Bush proposed and the democratic Congress rejected. Sadly $17B in cuts is as insignificant as a smudge of excrement on a tissue being washed out to sea with a ton of other garbage ('Sideways'). That is pretty much the total of the 'stimulus' for the first year. It creates no incentive to spend on your business as do investment tax credits. With ITC's you either pay the money to the government in taxes and arguably get back nothing or spend the money on some equipment or other items you need instead of paying the tax. THAT gets people and businesses to spend when there is no demand to otherwise give a reason to improve your business.
Fed money going into world financial markets, not loans.
So what is the money doing? Despite the TARP and TALF, hardly any money is being lent. We have talked to many businesses and even Donald Trump is saying that the government's and Fed's statements about lending are flat wrong. All that money has to be put somewhere, however, and as in the second half of 1999 when Alan Greenspan flooded the economy with billions of dollars ahead of Y2K, dollars that were not needed and just idle, it is being invested by the banks. That is one reason their profits jumped so much beyond expectations: they are getting this money for nothing and investing in the markets. They are buying commodities, oil, stocks, etc. Voila. Stock market takes off and shows unnatural strength just as in the 75% NASDAQ run in the second half of 1999.
An example is oil. It is surging, closing Friday at 58.62, up another $1.91. Huge move in a short period. Huge move indeed, given that US demand is at 2001 levels. You remember 2001: recession, 9-11. Our commodities market contacts tell us there are large buys of futures that are driving oil prices higher. We are getting that same kind of speculation of sorts that was so maligned during the presidential campaign. This extra money is chasing hard assets as a safe way to hedge against the inflation that this very money is going to create.
Talk about a vicious cycle or a self-fulfilling prophecy. The money is creating demand for products, but it is artificial demand. It is sewing inflation because there is demand but no corresponding increase in supply as there is no investment in the US. The very low inventory levels (Friday showed wholesale inventories at a -1.6% on top of February's 1.7% decline. Demand with no production or increase in supply creates inflation as more money (lots more money) heightens demand and chases fewer goods.
Inflation and a 1970 malaise ahead.
What lies ahead as a result: look at the Thursday bond auction and what happened to treasury yields afterwards. Yields are steadily rising, some say due to economic recovery. Again, look at the Thursday bond auction. There were very few takers and demand for US bonds was slack. Thus the Treasury had to offer better interest rates to get buyers to take what we were offering. That is the problem with you put $12T of spending, lending and guarantees out in the real world. Your buyers get nervous about your ability to pay. A bookie that lends you $100K for a couple of days is making a risky deal and thus you pay a high interest rate. The Treasury is not at bookie status yet, but Geithner is still new on the job, right? Nonetheless, our debt buyers wanted more interest for their perceived risk and the 10 year yield jumped to 3.35%. Just a couple of weeks back it was at 2.8%. This is the second poorly received bond auction in a month and it shows the increasing worry about the US and its massive spending on healthcare the general 'Europeanization' of the US. Hell, even the Europeans are damn worried about us doing this (recall the 'road to hell' comment).
The weak bond auctions underscore the problem of rising interest rates that are signaling rising inflation, not the improving economy that some claim this indicates. Yes the economy is slowing its fall but that is all it is doing. The rise in bond yields is disproportionately high compared to any improvement in the economic data. If things do not change this is going to lead to a humdinger of an inflation spike, and with massive expansion of government, more regulation, and forced government programs just as in the 1970's, we can look for 1970's style results, i.e. stagflation and its malaise.
Never have so many been so enthusiastic about an economy so weak.
Okay, okay you say, but isn't the economy improving? Didn't we say the economy was getting better? Yes. The data is getting better. It is slowing its decline as all of that liquidity creates some demand. It is not creating supply because the numbers are still so weak no one is investing in business, but it is ginning up a bit of demand.
And of course, the fall has to slow before it turns, and with all of this liquidity it is likely to continue to improve, but there is nothing to give it a real jolt and thus the improvement, as noted above, is likely to be very tepid, very 1970's.
Look at the manufacturing reports. Even before the stock market bottomed the ISM started to turn positive. Not slow the contraction, but turned to expansion. We were harping on this as a super positive development even as sentiment remained very negative. Indeed in October, the day the market turned, the despair was huge but the manufacturing data had turned the corner and the market picked up on it when not many others did.
Right now the manufacturing reports are off their lows (32.9), lows that were much worse than in 2001 and 2002. This was a bad recession, one teetering on depression. The ISM improved to 40.1 in April as the economy started to pull out of the depression dive. It has not turned positive and indeed is not close to turning positive unless someone monkeys with the data.
There is improvement in other areas as well, i.e. factory orders, durables orders, ECRI's indicators. They are pointing to an end of the recession, but there are two important points to consider. First, this recession was deeper and longer than any in recent history so we are starting at a much LOWER level in the recovery. Thus an end to the recession means it is over but are you 2 feet underwater or 20 feet underwater? This one we are the latter. Second, as noted all last week. An end to the recession doesn't equal rapid recovery. There are many reasons we are looking at a hockey stick, i.e. sharp down, long, slow and flat recovery. Weak dollar, inflation to come, overregulation, overspending. Many reasons.
YET, with such horrid data enthusiasm is erupting. Back in 2002 and early 2003 when the turn was being made the morale was horrible. The October to December stock market rally made everyone feel a bit better, but the whole time it was calls a bear market rally, and when the January to March test/correction ate up the gains the gloom was literally depressing. That correction actually showed great action with low volume down sessions, up volume rising sessions, and stocks setting up great patterns. We were positive and said so repeatedly just waiting for the moves by stocks such as EBYA, TSCO, AMZN and company to make the breaks higher. Man did they ever.
Right now everyone is gushing over and economic recovery when quite frankly the numbers on a comparative basis are much worse and the 'recovery' thus far still leaves all indicators massively underwater. Bernanke was not kidding when he said the pace of the decline was slowing. He did not say the economy was turning because it is not. It is halting the slide into depression but it needs a kick of stimulus to get everyone investing in the US again. As we saw again last week, foreigners are lukewarm in doing so with the weak bond auction. Thus it is up to us to create the investment, but the current policies are not doing that this year and it is highly debatable if they will ever do so as government spending historically fails to excite growth. It does debase your currency and lead to inflation, something that is happening faster than the economy's attempts at recovering.
No Great Depression II, but after this market run another bad recession.
In sum, because we were looking at Great Depression II in the face, the slowing of the swan dive in the economic data has elicited an over-exuberant conclusion that the economy is turning the corner. No, it is staving off another depression thanks to massive amounts of liquidity. Indeed the programs of government spending are the very things that are said to have prolonged the original Great Depression by 10 years. Thus the excitement about this turn is going to ultimately lead to disappointment and a pretty crushing double dip recession.
The good news? With all of this liquidity it might take two years to occur and the financial markets are likely to continue running higher. After all, even in the malaise of the 1970's the stock market had some very good upside years and indeed there was enough up and down volatility to make money trading the moves.
VIX: 32.05; -1.39. VIX ready to bounce and watching this along with NASDAQ and SOX as an indication a correction is coming near term.
VXN: 33.67; -0.8
VXO: 32.77; -1.38
Put/Call Ratio (CBOE): 0.87; +0.06
Bulls versus Bears:
This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.
This is a historical milestone in the making. Bulls are impressively low considering we are in general a very optimistic country. The few bulls is a positive indication because it means most everyone that is getting out is out and there is money on the sidelines. In other words the ammunition boxes are full and as the market recovers investors will start opening up the boxes and firing. Little by little they will be forced to put more money into the market and there will be some rushes higher in fear they are missing the train. You relish times when sentiment is so negative because it means some tremendous buys are setting up. This could indeed be the opportunity of a lifetime, and you take advantage of it by buying quality stocks and letting them work for you as long as they will. If we can hold them for years, great.
Bulls: 40.4%. As expected with the gains the bulls are jumping, starting to snort and stomp. Up from 36.0% the prior week though still below the 43.2% hit a month back before anticipation of stress tests and SOX' issues. Over the 35% threshold, below which is considered bullish, but this is not a bearish indication yet. Has to get up to the 60% to 65% level to be bearish. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.
Bears: 31.5%. Bears plummeted from 37.2% and the 37.1% four weeks back. As with bulls, below the 35% threshold considered bullish though not at bearish levels. Now far from off the high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.
Stats: +22.76 points (+1.33%) to close at 1739
Volume: 3.05B (-2.04%). Big volume Wednesday to Friday, and it was not all positive buying volume as NASDAQ struggles below the November peak.
Up Volume: 1.965B (+1.279B)
Down Volume: 1.212B (-1.338B)
A/D and Hi/Lo: Advancers led 3 to 1
Previous Session: Decliners led 2.04 to 1
New Highs: 29 (+3)
New Lows: 8 (+2)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Sold negative after the gap higher, but with the financials rallying again SP500 pulled NASDAQ back up with it. NASDAQ is struggling below the November high and with SOX getting slapped around and the large cap techs fighting to hold up this coming week is a key one for the techs. Again, the January peak is at 1666 and a logical retracement point though 1600 would be better. The question is whether the liquidity allows NASDAQ to make this kind of 'normal' retracement.
NASDAQ 100 (+0.31%) was a clear laggard to end the week but its pattern is fine as it holds right over the November peak and the 200 day SMA. Indeed it showed a doji on the candlestick chart Friday, tapping the 200 day on the low. NASDAQ 100 remains in good technical position, holding these twin support levels as volume rises. Unlike NASDAQ, the large cap techs are sitting on top of support versus below resistance.
SOX (-1.92%) took it on the chin again Friday though it recovered off the low to hold its break over the November peak. The problem we have here is that SOX broke out Monday after a three week lateral consolidation and then it gave it right back up, falling into the range on Friday. The only thing it did not do is give up the November peak. Early leader in trouble, putting a drag on NASDAQ. How SOX responds this week is key.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
Stats: +21.84 points (+2.41%) to close at 929.23
NYSE Volume: 1.897B (-3.82%). Another solid above average volume session as SP500 moves toward the November peak. Some churn Thursday but the upside strength continued.
Up Volume: 1.68B (+1.071B)
Down Volume: 212.138M (-1.145B)
A/D and Hi/Lo: Advancers led 5.5 to 1
Previous Session: Decliners led 1.84 to 1
New Highs: 28 (+1)
New Lows: 72 (-7)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Financials continued higher along with energy and commodities. A potent combination for the SP500 as it pushes toward November closing high at 935 and the intraday high at 944. The strength remains impressive as chase money chases the financials and the Fed liquidity makes commodities, materials, industrials, etc. attractive. Thus far no real slowing in SP500 but if NASDAQ stumbles SP500 is likely to test back from the November peak to at least give it a breather. It is liquidity driven right now and thus far that has made it all but bulletproof.
SP600 (+3.59%) enjoyed the same success as the large caps, rallying closer to the January peak and setting a new post-March high. Long, long run and a logical place to test back, but that was the case for the SP500 as well and that hasn't stopped it.
Followed SP500 higher, breaking to a new post-March high itself, clearing 8500. Still in a thick raft of resistance on up to 9000, and as long as SP500 moves higher on the back of financials and industrials, DJ30 is going to do the same.
Stats: +164.8 points (+1.96%) to close at 8574.65
Volume: 409M shares Friday versus 476M shares Thursday. Lower average trade Friday as volume remains stronger since Wednesday after three weeks of slow, low below average trade.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
The jobs report is history and the stress test dog and pony show is over, but a flood of earnings continue along with plenty of economic data. Retail sales, PPI, CPI, production and capacity utilization. They are not expected to show much improvement outside of retail sales and the new-found excitement for the consumer. Given all of the slobbering over the 'shoots of growth' this past week you would think expectations would jump.
Liquidity is driving SP500 and if that holds the market is likely to keep running overall. For this week, however, SOX is in trouble and NASDAQ is struggling. With the stress tests in the bank so to speak and the jobs report logged SP500 is looking for another catalyst and if NASDAQ corrects more SP500 will likely do the same. Then we have to see how much it does correct. When these liquidity rallies run history shows they have sharp, high volume corrections, but they don't last long. The market is more than due for a correction and NASDAQ is in the initial stages, and we think the techs will give back some this week. As they do, how the financials respond will tell the rest of the tale.
If techs correct we will look for points of entry for the upside after they hit key support levels, but we are also looking to play the overall move lower with some Q's. Energy stocks have shot higher and need a pullback. Commodities are still interesting as are industrials and we looking at them for upside positions from here. As money continues to move into the market, 'hard' stocks (materials, agriculture, industrials, commodities, etc.) and other stocks tied to inflation will continue to perform. Those should provide continued upside opportunity as all of this liquidity chases those areas as a hedge against inflation and as a way to play a new rise in China, India and company.
Many stocks surged in this last move that many are still very extended, but at the same time others are stepping up as money continues to move in and look for new targets. That pushes new stocks and sectors to the fore and we will continue looking for them to provide new opportunity.
Support and Resistance
NASDAQ: Closed at 1739.00
The 200 day SMA at 1742
1770 is the mid-October interim peak
1773 is the May peak
1780 is the November 2008 peak
1947 is the October gap down point
The 10 day EMA at 1721
The 18 day EMA at 1693
1673 is the prior April peak
1666 is the intraday January 2009 peak
1661 is the April 2009 prior peak
The January closing peak at 1653 (intraday)
1623 is the early April peak
1620 from the early 2001 low
The 50 day EMA at 1611
1603 is the December peak
1598 is the February 2009 peak, the last peak NASDAQ made
1587 is the March 2009 high is getting put to bed again
1569 is the late January 2009 peak
1542 is the early October 2008 low
1536 is the late November 2008 peak
1521 is the late 2002 peak following the bounce off the bear market low
1505 is the late October 2008 closing low.
1493 is the October 2008 low & late December 2008 consolidation low
S&P 500: Closed at 929.23
919 is the early December peak
935 is the January closing high
944 is the January 2009 high
The 200 day SMA at 955
899 is the early October closing low
896 is the late November 2008 peak
The 10 day EMA at 896
888.70 is the April intraday high.
The 18 day EMA at 879
878 is the late January 2009 peak
The prior April peak at 876
866 is the second October 2008 low
857 is the December consolidation low; cracking but not broken
853 is the July 2002 low
848 is the October 2008 closing low
846 is the April peak
The 50 day EMA at 845
842 is the early April peak
839 is the early October 2008 low
833 is the March 2009 peak
The 90 day SMA at 826
818 is the early November 2008 low
815 is the early December 2008 low
805 is the low on the January 2009 selloff. KEY Level
800 is the March 2003 post bottom low
768 is the 2002 bear market low
752 is the November 2008 closing low but it is not broken and done away with
741 is the November 2008 intraday low
Dow: Closed at 8574.65
8626 from December 2002
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9088 is the January 2009 peak
8521 is an interim high in March 2003 after the March 2003 low
8451 is the early October closing low
8419 is the late December closing low in that consolidation
8375 is the late January 2009 interim peak
The 10 day EMA at 8333
8315 is the February 2009 peak
8307 is the April 2009 intraday high
8197 was the second October 2008 low
8191 is the prior April peak
8175 is the October 2008 closing low. Key level to watch.
8141 is the early December low
The early April intraday peak at 8113
The early April peak at 8076
The 50 day EMA at 7970
7965 is the mid-November 2008 interim intraday low.
7932 is the March 2009 peak
7909 is the early January low
7882 is the early October 2008 intraday low. Key level to watch.
7867 is the early February low
7702 is the July 2002 low
7694 is the February intraday low
7552 is the November closing low. KEY Level.
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
May 8 - Friday
April Average Workweek (8:30): 33.2 actual versus 33.2 expected, 33.2 prior
Hourly Earnings, April (8:30): 0.1% actual versus 0.2% expected, 0.2% prior
Nonfarm Payrolls, April (8:30): -590K actual versus -620K expected, -699K prior (revised from -663K)
Unemployment Rate, April (8:30): 8.9% actual versus 8.9% expected, 8.5% prior
Wholesale Inventories, March (10:00): -1.6% actual versus -1.0% expected, -1.7% prior (revised from -1.5%)
May 12 - Tuesday
March Trade Balance (8:30): -$29.2B expected, -$26.0B prior
Treasury Budget, April (14:00): -$63.0B expected, $159.3B prior
May 13 - Wednesday
April Export Prices ex-aq. (8:30): 0.1% prior
Important Prices ex-oil, April (8:30): -0.6% prior
Retail Sales, April (8:30): -0.1% expected, -1.2% prior
Retail sales ex-auto (8:30): 0.0% expected, -1.0% prior
Business Inventories, March (10:00): -1.1% expected, -1.0% prior
Crude Oil Inventories, 05/08 (10:30): +605K prior
May 14 - Thursday
April Core PPI (8:30): 0.1% expected, -0.0% prior
Initial Jobless Claims, 05/09 (8:30): 601K prior
PPI, April (8:30): 0.1% expected, -1.2% prior
May 15 - Friday
Core CPI, April (8:30): 0.1% expected, 0.2% prior
CPI, April (8:30) 0.0% expected, -0.1% prior
Empire Manufacturing, May (8:30): -15.00 expected, -14.65 prior
Net Long-Term TIC Flows (9:00): NA expected, $22.0B
Capacity Utilization, April (9:15): 68.9% expected, 69.3% prior
Industrial Production, April (9:15): -0.6% expected, 69.3% prior
Michigan Sentiment-Preliminary, May (9:55): 65.0 expected, 65.1 prior
By: Jon Johnson, Editor
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