News Archive

Stock swings may signal bull run is in its last throes

LONDON (Reuters) – Stocks are showing the kind of volatility that preceded major falls in the past, suggesting to some that one of the most blistering U.S. rallies on record may be nearing its end.

The market is undergoing big swings under the influence of plunging oil prices and resulting turmoil in Russia, as well as the Federal Reserve’s only gradual shift away from ultra-low interest rates and – on Tuesday – data showing a sharp acceleration of the U.S. economy.

The series of short-term rallies and selloffs has revived memories of events before the “Black Monday” crash of October, 1987, and more recently the global crisis of the past decade.

The SP 500 has more than trebled from its post-crisis low of 666 points in March 2009 .SPX. The Dow Jones Industrial Average .DJI climbed above 18,000 for the first time after Tuesday’s data showed GDP grew at an annualized 5 percent in the third quarter, the fastest rate in 11 years. That means the Dow has gained 1,000 points in just one week.

Larry McDonald, senior director and head of U.S. strategy at Newedge in New York, noted wide price swings before deeper and longer-term declines as previous bull markets ran their course.

“You had a lot of this in the summer of 2007 and the summer of 1987,” he said. “Our systemic risk indicators are showing a very high scoring in terms of risk. I think we are anywhere from two to eight weeks away from the big one – a fall of 10 percent or more.”

A 10 percent reversal in markets is often termed a “correction”.

Already on Monday the SP and Dow had both notched up yet another record closing high. For the SP it was the 50th this year, the most in any year since 1995.

Other examples of the high volatility abound. The Dow jumped 421 points last Thursday, marking its biggest daily rise this year. That took gains over the Wednesday and Thursday to more than 700 points, its sixth biggest two-day rally in history.

This surge was fueled by the Fed, which said last Wednesday it would remain “patient” in keeping interest rates ultra-low, and followed a stomach-churning fall the week before.

Russia’s currency hit a new all-time low, due partly to the drop in the price of oil, its major export. The ruble’s 12 percent fall on Dec. 15 alone was its biggest daily loss since the 1998 crisis. And oil’s slide accelerated, taking Brent crude down almost 50 percent since June to a fresh five-year low.

In the week ending Dec. 12, the SP fell 3.5 percent, breaking a run of seven weekly gains and recording its biggest weekly loss since May 2012. 

“It’s very unsettling. The market shouldn’t be doing this. It’s almost got an air of 2007-2008 about it,” said Mark Ward, head of execution at Sanlam Securities in London. “The Dow shouldn’t be rallying 400 points, the biggest rally in years. The news isn’t good enough to see the rallies we’re having and the news isn’t bad enough to see the sell-offs we’re getting.”


The roller-coaster ride of the last few weeks may be an indication of what’s to come if similar periods of volatility in recent history are any guide, said Ashraf Laidi, head of global strategy at City Index in London.

Before the bull runs in the SP from 1995 to 1999 and from 2003 to 2007 ended, investors also faced wrenching price moves, as the following graphic shows:

Laidi noted that the SP has risen for seven consecutive weeks on nine previous occasions, but never in those cases did the index fall more than 2 percent in the week that ended the winning streak. The SP’s 3.5 percent fall in the week ending Dec. 12 “shows an unprecedented departure in sentiment from greed to fear”, he said.

That fear, however, should not prevent the rally continuing as long as economic growth and easy monetary policy around the world underpins corporate earnings and profitability.

Investors have been through this before. In the past strategists, worried about the longevity of the rally and global economic signals, have said it’s time stocks took a break, only to see them rocket higher in the months that followed.

Investors wary of missing out on what could be a late-stage bull market have been jumping in, quickly seeking bargains after two near-corrections in the last three months.

However, with valuations stretched and wages starting to rise, particularly in the United States, corporate results will have to be stronger to maintain stock-price gains. Otherwise, the squeeze in margins is likely to yield meager price appreciation in 2015.

The most recent Reuters quarterly poll of equity strategists suggests a 6 percent rise in the SP in 2015 and a 9 percent and 10 percent gain in Germany and France, respectively.

While further gains may be harder to come by, it may be too early to call the end of the bull market.

“Volatility is a fact of life in financial markets and next year looks set to be more unsettled than this one,” said David Stubbs, global market strategist at JPMorgan Asset Management in London.

“But investors should consider looking through short-term market swings and stay invested to benefit from the uptrend in corporate earnings we are expecting to see on both sides of the Atlantic.”

(Reporting by Jamie McGeever; Additional reporting by Lionel Laurent and Mike Dolan in London, David Gaffen in New York, graphic by Nigel Stephenson; editing by David Stamp)

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ECB sets Volksbanken capital goal as ‘bad bank’ plan approved

VIENNA (Reuters) – The European Central Bank has told Austria’s Volksbanken group to strengthen its balance sheet by next July as it rushes to wind down its flagship unit and plug a capital hole exposed by this year’s health checks on euro zone banks.

Owners of part-nationalized Volksbanken AG (VBAG) (OTVVp.VI) on Tuesday approved in principle plans to turn the group’s lead institute into a “bad bank”, relieving pressure on other regional lenders in the Association of Volksbanks that own 52 percent of VBAG.

By relinquishing its banking license next year VBAG would be freed from minimum capital requirements for banks, and simply run off its remaining assets over the years to come.

It said that the ECB had now given the Association a draft target to maintain a common equity tier 1 (CET1) capital adequacy ratio of 14.63 percent of risk-weighted assets from July 26, 2015. The Association had a CET1 ratio of 11.5 percent at the end of September.

Volksbanken officials said the preliminary target was based on end-2013 data which did not reflect the drastic overhaul plan unveiled in October and the scheduled sale of its problematic Romanian unit in the first half of next year.

They gave no figures on how the group’s CET1 ratio would look taking those factors into account.

VBAG has said its conversion into a “bad bank” will trigger around 500 million euros in writedowns this year and wipe out more than half its capital.

On Tuesday it put its expected 2014 loss at around 750 million euros ($913 million).

Volksbanken, in which the state has a 43 percent stake after a 2012 rescue, still needs regulatory approval from the European Commission, ECB and national authorities for its wind-down.

With the state opposed to injecting more aid on top of the 1.35 billion euros Volksbanken has already got, and the regional banks unable to chip in, it remains unclear who would foot the bill should the ECB insist on a capital top-up.

The bank said its management board had told a shareholder meeting “that currently neither VBAG’s core shareholders nor third parties are prepared to provide capital to VBAG”.

VBAG shareholders include DZ Bank [DETGNY.UL] with 3.8 percent and Raiffeisen Zentralbank [RZB.UL] with 0.9 percent.

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(Reporting by Michael Shields; Editing by William Hardy, Greg Mahlich)

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SEC’s new investor watchdog lays out risky products for 2014

WASHINGTON (Reuters) – The U.S. securities investor watchdog office on Tuesday unveiled its list of the top products and practices that bedeviled mom and pop investors in 2014.

In an annual report on market activities, the Securities and Exchange Commission’s Office of the Investor Advocate said private placements, variable annuities, non-traded real estate investment trusts (REITS) and binary options all presented problems for investors.

The report also highlighted concerns about “reverse churning,” in which a broker transfers the account of a client who does not frequently trade into another account with fees based on asset size so the brokerage can boost its compensation.

“The Investor Advocate does not believe that changes in rules or regulations are required to address the problem of reverse churning,” the report says. “Rather, aggressive enforcement action … should be sufficient to deter this type of unethical practice.”

The 2010 Dodd-Frank Wall Street reform law required the SEC to create the Office of the Investor Advocate, tasked with analyzing how new rules will affect investors, helping retail investors resolve problems with the SEC, spotting problematic trends and advocating for rule changes as needed.

The office first got up and running in February, and is led by Rick Fleming, former deputy general counsel for the North American Securities Administrators Association.

The law requires the office to file two reports a year. One, due in June, concerns the office’s objectives and one, in December, is about activities that may pose risks for investors.

Among the top risks highlighted include private placements, a popular fundraising method in which companies issue shares or bonds to a select group of higher net worth investors through private sales executed by brokerages.

The deals do not need to be registered with the SEC, so they do not need to disclose as much information to investors.

Many of the risks, such as conflicts of interest involving how companies often pay third-party firms to conduct due diligence checks prior to selling the deals, were highlighted by Reuters in a recent series of articles. [ID: nL2N0N10TQ0]

Tuesday’s report did not make any policy recommendations on private placements, but noted they are “highly illiquid” and “lack transparency.”

It also said it was concerned about confusing fees associated with variable annuities and high up-front costs that investors face in non-traded REITS.

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Bank dealmakers set for bonus cheer, bond traders not so much

LONDON (Reuters) – Investment bankers working on corporate takeovers and share issues can expect good news on bonuses when they return from the holidays after a buoyant year, but bond and currency traders face lower payouts.

Investment banks will finalize bonuses over the next two months and early signs are that average payouts will be relatively flat or slightly higher across most banks, although totals could drop at banks that have cut staff.

“We’re seeing bonus pools on average up by between 5 and 10 percent on 2013 numbers, but that’s massively differentiated across different businesses,” said Giles Orringe, a London-based partner at executive search firm Heidrick Struggles.

At the upper end of the range, merger and acquisitions dealmakers and those advising on debt and equity issues should see bonuses up 5-10 percent on average, industry sources said.

Taking a more bullish line, Greg Bezant, director at recruitment firm Phaidon International in Zurich, predicted bonuses could be up 20-25 percent in some areas and merger and acquisitions and private equity units should fare well.

Traders in fixed income, commodities and currencies are likely to see bonuses drop by up to 10 percent, however, after another bruising year.

Several banks are also expected to cut payouts in areas where they have been fined heavily for misconduct. Six banks were fined a record $4.3 billion for attempted foreign exchange market rigging and there have also been fines for manipulating interest rates and commodities prices and other misdemeanors.

Several banks are under more pressure than others to cut costs hard, which could see European banks being more restrained than U.S. rivals, industry sources said.

Barclays (BARC.L) angered investors last year by increasing bonuses despite a drop in profits, and its Chief Executive Antony Jenkins has already signaled a likely cut in payouts. “I don’t think it will be as controversial,” he said this week.

Banks contacted by Reuters over their bonus plans have declined to comment before they are finalised in full-year results.


Bankers’ bonuses remain a lightning rod for industry critics and politicians who say not enough has been done to bring down high pay that encouraged the risk-taking that contributed to the financial crisis. Many shareholders, too, say pay needs to come down to help get returns back above the cost of capital.

U.S. bank JPMorgan (JPM.N) paid managing directors on trading desks in London 461,000 pounds ($715,000) on average in 2013, according to Emolument, a website that benchmarks salaries. Emolument said bonuses averaged more than 200,000 pounds at Deutsche Bank (DBKGn.DE), UBS, JPMorgan and Credit Suisse investment banks last year.

Bonuses for 2014 are expected to broadly reflect performance across business lines and the mixed fortunes for dealmakers and traders in London are expected to be repeated on Wall Street.

Revenues derived from takeover advice and share and debt offers are up 7 percent this year to their highest level since 2007, thanks to a deal-making frenzy in the healthcare, telecoms and consumer sectors and a revival in share offerings, according to Thomson Reuters data. JPMorgan and other U.S. banks made the most from fees.

Those advisory revenues only make up about one-third of investment bank revenues, however.

Overall revenues are likely to be down 4 percent on the year at $257 billion, led by a 12 percent drop in fixed income, commodities and currencies, and a 3 percent dip in equities, consultancy firm Coalition estimated.

That could mean some bankers’ expectations are too high. A survey by recruitment firm Astbury Marsden said senior London finance sector staff expect bonuses to jump 21 percent this year.

The next bonus season, typically between mid-January and mid-March, will mark the start of another round of intense scrutiny of how banks structure pay in Europe.

Many banks introduced role-based “allowances” this year to meet EU rules that cap bonuses at twice a banker’s fixed salary, but firms will have to change their pay structure again after regulators said those allowances must count as variable pay in the future.

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(Additional reporting by Clare Hutchison; Editing by Giles Elgood)

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France waves discreet goodbye to 75 percent super-tax

PARIS (Reuters) – When President Francois Hollande unveiled a “super-tax” on the rich in 2012, some feared an exodus of business, sporting and artistic talent. One adviser warned it was a Socialist step too far that would turn France into “Cuba without sun”.

Two years on, with the tax due to expire at the end of this month, the mass emigration has not happened. But the damage to France’s appeal as a home for top earners has been great, and the pickings from the levy paltry.

“The reform clearly damaged France’s reputation and competitiveness,” said Jorg Stegemann, head of Kennedy Executive, an executive search firm based in France and Germany.

“It clearly has become harder to attract international senior managers to come to France than it was,” he added.

Hollande first floated the 75-percent super-tax on earnings over 1 million euros ($1.2 million) a year in his 2012 campaign to oust his conservative rival Nicolas Sarkozy. It fired up left-wing voters and helped him unseat the incumbent.

Yet ever since, it has been a thorn in his side, helping little in France’s effort to bring its public deficit within European Union limits and mixing the message just as Hollande sought to promote a more pro-business image. The adviser who made the “Cuba” gag was Emmanuel Macron, the ex-banker who is now his economy minister.

The Finance Ministry estimates the proceeds from the tax amounted to 260 million euros in its first year and 160 million in the second. That’s broadly in line with expectations, but tiny compared with a budget deficit which had reached 84.7 billion euros by the end of October.


A first version of the tax payable by the earners themselves was thrown out by the Constitutional Court as punitive. A final version obliged companies to pay the levy instead.

French soccer clubs briefly threatened to go on strike, and actor Gerard Depardieu took up Russian residency in a one-man protest against the French tax burden, among the highest in the world. Others were making more discreet arrangements.

“A few went abroad — to Luxembourg, the UK,” said tax lawyer Jean-Philippe Delsol, author on a book on tax exiles called “Why I Am Going To Leave France”.

“But in most cases, it was discussed with their company and agreed to limit salaries during the two years and come to an arrangement afterwards,” he told Reuters by telephone.

Hollande and his government have since sought to relieve business of around 40 billion euros of taxes and other charges, as unemployment at over 10 percent drives home the urgent need to attract investment to the sickly French economy.

It was no accident that Prime Minister Manuel Valls — alongside Macron the main reformer in Hollande’s cabinet — chose a visit to London in October to confirm that the super tax would not be renewed: his British counterpart David Cameron famously offered to “roll out the red carpet” to French tax exiles.

But Delsol said the saga had made his clients more nervous about investing their time and money in France and had only added to mistrust of a complex tax system which successive governments have failed to reform.

“People have lost confidence,” he said. “That is not something you can restore overnight.”

($1 = 0.8216 euros)

(Additional reporting by Jean-Baptiste Vey; Editing by Ruth Pitchford)

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Argentina loses U.S. appeal over creditors’ subpoenas

NEW YORK (Reuters) – A U.S. appeals court on Tuesday rejected Argentina’s bid to reverse a decision requiring the country and various banks to provide holdout creditors with information about the country’s assets, including military equipment and diplomatic property.

The 2nd U.S. Circuit Court of Appeals in New York affirmed the 2013 ruling, which ordered the banks and Argentina to comply with subpoenas and information requests served by bondholders suing for full payment of debts after Argentina’s $100 billion default in 2002.

The holdouts are creditors that declined to accept the terms of 2005 and 2010 Argentina debt restructurings, in which it swapped about 92 percent of its bonds for new obligations.

While the court upheld U.S. District Judge Thomas Griesa’s ruling, the three-judge panel stressed “that Argentina – like all foreign sovereigns – is entitled to a degree of grace and comity.”

Saying those concerns were of “particular weight” when it came to a country’s diplomatic and sovereign affairs, the 2nd Circuit urged Griesa to prioritize the production of documents “unlikely to prove invasive of sovereign dignity”.

Neither a U.S. lawyer for Argentina nor a representative for a lead hold bondholder, Elliott Management’s NML Capital Ltd, responded to requests for comment.

Argentina defaulted in July of this year after refusing to honor orders barring it from paying holders of its restructured bonds without also paying $1.33 billion plus interest to holdout creditors including NML.

Argentina’s latest default came after it refused to obey Griesa’s order on paying the holdouts. Griesa held Argentina in contempt in September.

Argentina has said it cannot pay the holdouts until the Dec. 31 expiration of a clause that prevents it from paying them on better terms than it pays holders of restructured debt.

The appeal that the 2nd Circuit ruled on Tuesday concerned an order compelling Argentina and 29 banks to comply with subpoenas and information requests by the holdouts aimed at finding assets outside the country to fulfill unpaid judgments.

Argentina contended the order would effectively allow an inventory of military and diplomatic assets that were protected from seizure by U.S. law and various treaties.

But the 2nd Circuit said that insofar as the information demands reached diplomatic or consular property immune from being pursued by the creditors, Argentina should object when the bondholders seek to execute on such property.

Argentina may also present certain other objections regarding producing the documents to Griesa on privilege and treaty grounds, the appeals court said.

(Reporting by Nate Raymond in New York; Editing by Chizu Nomiyama; and Peter Galloway)

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Informal capital controls arrest Russian ruble’s slide

MOSCOW (Reuters) – The rouble hit its highest levels in two weeks on Tuesday, shored up by informal capital control measures designed to head off a repeat of the inflation and protests that marked Russia’s 1998 financial crisis.

The government set limits on net foreign exchange assets for state-owned exporters, while officials and banking sources said the central bank had installed supervisors at the currency trading desks of top state banks.

Early in the day, the rouble hit 52.88 to the dollar, its strongest since Dec. 8. It fell back later but was still was up 1.4 percent at 55.34 at 1810 GMT. Before the recent rebound, the rouble fell as low as 80 per dollar last week, from the average of 30-35 seen in 2014’s first half.

Economists said the measures were effectively a softer version of capital controls, but that President Vladimir Putin, who has drawn much of his popularity from financial stability and rising prosperity, would keep his pledge not to resort to full-fledged controls.

“They have already forced government exporters to sell their dollars, and same will happen for banks I guess, so in a sense, capital controls are already in place,” said Sergei Guriev, an exiled economist who fled Russia after criticizing the Kremlin.

Russians are no strangers to currency crises, having seen hyperinflation destroy their savings after the collapse of the Soviet Union, before Putin came to power.

The rouble plunged to an all-time low in mid-December on the back of lower oil prices and Western sanctions, which make it almost impossible for Russian firms to borrow from the West.

Prime Minister Dmitry Medvedev said on Tuesday that Russia risks deep recession. Standard and Poor’s ratings agency said it was putting the country’s credit outlook on creditwatch with negative implications, a warning of a possible downgrade.

“The creditwatch placement stems from what we view as a rapid deterioration of Russia’s monetary flexibility and the impact of the weakening economy on its financial system,” the agency said.

Former Finance Minister Alexei Kudrin warned on Monday that Russia is likely to be downgraded to ‘junk’ territory next year.


On Tuesday, the Russian government told large state exporting companies that by March 1 they must bring their net foreign exchange assets back to the levels of Oct. 1 and report to the central bank on a weekly basis.

“Of course, the companies are free to hold on to the hard currency, they are also free to get involved in speculative operations. But then we reserve the right not to help them if and when they hit tough times,” said one government source.

He said companies that needed to repay large foreign debts could continue to accumulate hard currency.

“If exporters are told not to increase their hard currency positions, it can be viewed as an unofficial reintroduction of capital controls,” said Vladimir Osakovskiy from Bank of America Merrill Lynch.

Limiting money flows, once considered a damaging constraint on open markets, has been more accepted in the aftermath of the 2008-2009 financial crisis as a tool sometimes needed to manage financial stability.

But in Russia, the issue has political resonance. Capital movements were liberalized only 10 years ago and restrictions bring back memories of the chaotic post-Soviet financial turbulence which Putin, now in his 15th year as Russia’s leader, made it his mission to banish.

Full capital controls “would be a huge immediate blow to the economy”, Mikhail Zadornov, chairman of the board of VTB-24 bank, told the newspaper Vedomosti. “It would intensify capital outflows and cause a complete loss of confidence in the country among both domestic and foreign investors.”


Instead, Russian authorities are being pragmatic.

Four banking sources and sources close to the government said that the central bank had last week begun sending supervisors to monitor currency trading at major Russian banks.

“There was panic,” said a source close to the government. “Something had to be done and we took some measures.”

The central bank expects net capital outflows to hit $130 billion this year and Russia can ill afford to lose any more, with economists forecasting that an already slowing economy will shrink 3.6 percent next year.

“Yes, we have to report all of our activities to them, they are very meticulous,” said a source at one of Russia’s top five banks.

Another source at a large bank said: “As of Monday (Dec. 16), currency comptrollers have been sitting in and monitoring our currency positions, checking who bought foreign currency.”

The central bank declined to comment on this, telling Reuters only that it would hold talks with exporters about maintaining stability on the foreign exchange market.

Traders said the ruble’s recent rise, for a couple of sessions now, was due partly to the government orders and partly to regular tax payments, which require exporters to sell dollars or euros for rubles. The tax payments are to peak around Dec. 25.

The government’s order to sell hard currency was given to gas firm Gazprom, the oil firms Rosneft and Zarubezhneft, and the diamond producers Alrosa and Kristall.

“I can imagine for a while they will use these capital-control-like measures without full-blown capital controls,” Guriev said. “But if depreciation continues, they may actually do this.”

(Additional reporting by Oksana Kobzeva, Vladimir Abramov and Polina Devitt; Writing by Dmitry Zhdannikov and Lidia Kelly; Editing by Kevin Liffey/Jeremy Gaunt and Mark Trevelyan)

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U.S. new home sales fall for second straight month in November

WASHINGTON, (Reuters) – Sales of new U.S. single-family homes fell for a second straight month in November, a sign that the housing market recovery remains fragile.

The Commerce Department said on Tuesday that sales declined 1.6 percent to a seasonally adjusted annual rate of 438,000 units. October’s sales pace was revised down to 445,000 units from 458,000 units.

Economists polled by Reuters had forecast new home sales rising to a 460,000-unit pace last month.

New home sales, which account for about 8 percent of the housing market, tend to be volatile month to month. Compared to November last year, sales were down 1.6 percent.

A report on Monday showed home resales tumbled to a six-month low in November.

The housing market is being hobbled by a slow pace of household formation, a result of sluggish wage growth. An acceleration is expected next year as a strengthening labor market fosters a faster pace of wage growth.

Last month, new home sales fell in the Northeast, the Midwest and the South. They rose 14.8 percent in the West.

The stock of new houses available on the market rose 1.4 percent last month to 213,000, the highest since May 2010.

At November’s sales pace it would take 5.8 months to clear the supply of houses on the market, up from 5.7 months in October. The median new home price rose 1.4 percent from a year ago to $280,900.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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U.S. consumer sentiment rises to best since 2007

NEW YORK (Reuters) – U.S. consumer sentiment jumped in December to its highest level in nearly eight years on cheaper gasoline and better job and wage prospects, a survey released on Tuesday showed.

The Thomson Reuters/University of Michigan’s final December reading on the overall index on consumer sentiment came in at 93.6, its best showing on a final basis since January 2007 and the latest in a string of increases since August.

The reading was up from 88.8 the month before but under the preliminary reading of 93.8. It was above the median forecast of 93.5 among economists polled by Reuters.

“Consumers held the most favorable long-term prospects for the national economy in the past decade,” said Richard Curtin, the survey’s director. “Importantly, the 2014 gains in jobs and wages were widespread across all population subgroups and regions.”

The survey’s barometer of current economic conditions rose to 104.8 from 102.7 in November, versus a forecast of 105.1.

The survey’s gauge of consumer expectations also climbed to 86.4 from 79.9 in November and was above the expected 85.0.

The survey’s one-year inflation expectation was unchanged from November at 2.8 percent but down from 3.0 percent a year earlier, Curtin said in a commentary.

(Reporting By Michael Connor in New York; Editing by Chizu Nomiyama)

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