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Saturday, November 28, 2009

Weekly Newsletter -- Dec 4, 2009

Week Ending Dec , 2009                              Volume15, Number 21               

This Week: Dump the Dow!

Check out an interesting long-short strategy, Trading the IBD 100, at theStreet.com

Stock market trend: Bullish Trend Under Growing Pressure

Market Pulse

My crusade this week is to get financial analysts to stop focusing on the Dow Jones Industrial Average is the most important symbol of the US stock market. In the ticker tape parade everyday on CNBC, I would much rather see the S&P 500, the NASDAQ, and the Russell 2000 rather than the Dow. The Dow is only 30 stocks and most have a lot of international exposure so the index is hardly reflective of the state of the US market. In contrast, the S&P 500 is the broadest measure of the US stock market, the NASDAQ gives us our best snapshot of technology, while the Russell 2000 provides the best glimpse of future growth and productivity as measured by the ability of the small-cap US economy to bring forth innovation.

I am up on my soapbox this week about this because if you have been watching the Dow exclusively, you have been seeing quite a different picture of the market than if you have been watching the three other indices. The fact of the matter is that the Dow has been doing better than the S&P 500, NASDAQ, and the Russell 2000; and in some ways, the Dow's relative outperformance has been lulling the Bulls into a false sense of security. This extended passage from Market Edge provides an interesting interpretation of the Dow as it relates to any confirmation of the market trend:

[T]he DJIA posted another new recovery high while the broader indexes failed to confirm the move. This has been the case over the last three weeks and doesn't bode well for the market going forward. A confirmed high occurs when the DJIA records a new closing high which is accompanied by a majority of the broader major averages also posting new highs. It is especially important that the NYSE A/D line and the number of NYSE 52-week new highs confirm the move. Since closing at 9712.73 on 10/30/01, the DJIA has recorded six new recovery highs. The high on 11/16/09 (DJIA 10406.96) was the closest to being a confirmed high as four of the nine broader indexes followed suit. When the DJIA closed on 11/23/09 at 10450.95, none of the broader indexes posted a new high. Also, the NYSE A/D line is off by over 1600 units from it's high recorded on 10/19/09 while the NASDAQ A/D line is some 8000 units below it's 10/14 high. This divergence is why the Momentum Index is so negative. The fact that there has been six non-confirmed highs over the last three weeks without a sell off is very unusual. It is like stretching a rubber band. At some point it should snap. [Emphasis added]

Given my long-standing concerns about the macro fundamentals of the US economy -- high unemployment, rising oil prices, a housing market still in disarray, looming crushing budget deficits at both the state and federal level, and the debasement of our currency by the Federal Reserve -- and given the bearish technical conditions of the US markets, my strategy remains largely one of holding cash.

That said, at the beginning of the last week when the market popped up on Monday, I "sold the rally" by opening a small short position in TWM -- the ultrashort exchange traded fund for the Russell 2000. Loyal readers will know that this is my favorite shorting instrument because of its volatility and the tendency for small caps to lead the market either up or down.  If the market heads down, as I believe it will, I will add to this position. If the market heads back up, I will simply close my TWM position at my original purchase price and thereby incur no loss -- I'm now playing with the house's money.

I see this coming week as a showdown of sorts. The debacle in Dubai is a fresh reminder of the fragile state of many countries around the world still working off their credit crisis karma. We will get a good look at the consumer spending patterns for the holiday -- we can bearish are strong and bullish. We should also see some resumption of volume in this market. This is important because over the last month volume has been very unusually low.

With the trend remaining a flip of the coin, the best strategy in this market may well be to be primarily in cash. However, I've also come up with an interesting strategy for more aggressive traders that is featured this week in a video I produced for the Street.com. In a nutshell, the "long-short" strategy involves a basket of six stocks drawn from the IBD 100. The long stocks include BUCY, EPAY, and CTRP.  The short stocks include ININ, TNS, and EJ.  Check out the video as you may find this to be a really interesting strategy. This strategy will only work, however, for traders who know how to manage risk, cut their losses, and employ trailing stops.

11:33 am est 

Saturday, November 21, 2009

Newsletter for Week Ending November 28, 2009
You know the stock market is in trouble when the only explanation for stock price movements is the direction of the dollar. Market goes up -- must be the dollar going down. Market goes down like last week -- must be the dollar firming up.

Never mind how corporate earnings are doing. Never mind whether or not the global economy is recovering. Never mind anything. It's all about the direction of the dollar.

What I find positively stupid about all this is that the logic doesn't work. Suppose you are a foreign investor holding euros or yen or Australian dollars. If you think that the US dollar is going to decline over time because of rising budget deficits and an ultra-easy money policy of the US Federal Reserve, there is no way that you are going to buy dollar denominated assets in the US stock markets. That's just plain stupid.

Suppose, alternatively, that you are a US citizen holding dollars and seek to earn a reasonable return on some type of investment. Given a choice between holding the US market in the form of an exchange traded fund like SPY or buying exchange traded funds of the countries or regions that are likely to see currency appreciation against the dollar, there is similarly no way that you're going to choose investing in the US market.

Well, then, how about all this carry trade stuff? Shouldn't that cause US stock markets to rise? By definition, absolutely not. The whole idea of the carry trade is to borrow US dollars and invest them in higher yielding assets abroad -- not the US stock market itself.

At least from my perspective, all this adds up to a really bad case of spurious correlation. Yes, the dollar has declined by almost 20% since March of 2009 while the stock market has gone up. But no, the dollar's decline can't be the cause of this.

This as an important implication: The observed co- movement of the dollar and US stock prices is likely unsustainable. To repeat, why the hell would anybody in their right mind invest in the US stock market -- that is, dollar denominated assets -- if they think the dollar is going to continue to go down. It makes absolutely no sense.

On this matter, I would love to hear from any of my readers -- or, for that matter, any of my fellow co- contributors on CNBC . Specifically, I would like to hear a cogent argument as to why the stock market in the United States should go up when the dollar declines. And spare me the "law of one price" argument which would argue that all the stock market is doing is adjusting upwards in nominal value to account for the decline in the dollar. This simply doesn't wash because rational actors out in the world would prefer to chase higher returns elsewhere rather than simply tread nominal value water with the US market.

Anyway, that's my beef for the week. I'm tired of hearing all this dollar nonsense without any logical explanation of the alleged effect other than a few buzzwords about "carry trade." If the carry trade were truly lifting the US stock market, the Japanese stock market, which benefited from the carry trade for almost a decade, would be at 100,000 right now.

To close, a few observations on the market trend. Loyal readers know that I called a market top some weeks ago and have thus far have been either dead wrong or just a little ahead of the curve. The truth may be somewhere in the middle as there is emerging evidence of a possible range bound market and a resumption of a sideways pattern, with the top of the range only slightly extended now.

This is a situation that we must watch very closely now. I continue to be mostly in cash -- although last week I dipped in and out of the market with a nice nibble on TWM -- the exchange traded fund that ultra- shorts the Russell 2000. These are the kind of short- term trades that at least keep me on my toes and attentive to the market trend.

Last take: the Chinese government needs to shut its pie hole on the currency question. Over the last week, as the supplicant Barack Obama embarrassed himself in Beijing, Chinese government officials repeatedly attacked the US for its large budget deficits while denying that it's currency manipulation had anything to do at all with weakness in the US economy or the ability of the US to run those budget deficits.

This is just so much Chinese garbage, and it would be refreshing if the Obama administration had the same kind of "ready response" to these criticisms that it had whenever Hillary Clinton attacked Obama during his campaign. It's the first rule of politics -- you don't let a false charge go unanswered. Yet Obama and his clueless lieutenants keep allowing the Chinese to have the upper hand in this trade reform debate when the Chinese government has the blood of the American economy all over its hands.


November 18, 2009


By Peter Navarro

Has America's Federal Reserve become the single greatest obstacle to global economic recovery? Central bankers around the world are increasingly asking this question as the American greenback continues its Fed-inspired decline and damages the export-driven growth of countries from Latin America and Asia to Europe.

Historically, the Fed has responded to economic downturns by cutting interest rates to stimulate domestic business investment and consumer purchases of "big-ticket" items, like automobiles and housing, that are sensitive to the cost of loans. However, in the current crisis, this traditional formula is simply not working.

It's not working in part because the Fed's "solution" has been a concentrated dose of the problem. After years of promoting the easy money and loose credit that fueled asset bubbles, it has responded with even easier money and even looser credit. It's like fighting fire with gasoline.

American consumers are not responding to the Fed's liquidity surge because high employment, high oil prices, bottoming home prices, and stagnant wage growth have squeezed their purchasing power. Business investment has likewise failed to fill the recessionary gap because much of the investment US corporations used to make on American soil is increasingly being sent off shore.

Despite this lack of responsiveness, Fed Chairman Ben Bernanke continues to throw monetary stimulus at the problem - and thereby has created an international dollar crisis now threatening the global recovery.

The declining dollar story is one of weakening demand for, and a massive oversupply of, the greenback. It is a sad and sordid tale scripted almost entirely by the Fed.

During the worst months of the global financial crisis, investors flocked to the dollar as a haven amid the storm. But since March 2009, when economic policy under the Bernanke Fed and the Obama administration became clearer, they have fled the greenback. In that time, the dollar index has fallen 16 percent.

You can't blame investors for selling. By first driving, and then maintaining, short-term interest rates near zero, the Bernanke Fed has made it far less attractive for them to hold dollars.

In a desperate effort to break the back of the credit crisis, the Fed has also engineered the most massive increase in the money supply in US history. Since 2007, the Fed has roughly doubled the monetary base. This, however, is only half of the oversupply story.

The other half of the tale involves the willingness of the Bernanke Fed to help accommodate the rapidly rising, and historically unprecedented, US budget deficits. Such accommodation involves the Fed's willingness to print new money to purchase many of the government bonds being issued by the Treasury Department to finance the budget deficit.

The practical effect of the Fed's easy money policies has not been to stimulate the US economy through traditional channels of domestic consumption and business investment. Rather, it has debased the dollar and thereby, in true beggar-thy-neighbor fashion, helped to stimulate demand for US exports while discouraging imports from the rest of the world. To the rest of the world, this policy seems cynically aimed at bootstrapping the American economy through exports at the expense of its trading partners.

This beggar-thy-neighbor effect is further complicated by the Chinese government's pegging of its currency to the falling greenback. Because of this peg, every time the dollar falls, the Chinese yuan falls with it. The steadily weakening yuan has further boosted the already formidable competitive advantage of Chinese manufacturers in markets across the globe.

In response to sluggish export demand in their home countries and the loss of market share to China, central bankers around the world are beginning to retaliate with large-scale interventions in the currency markets designed to brake the dollar's decline relative to their own currencies. The clear danger is that this tactical retaliation will devolve into a longer term strategy of competitive devaluations that will ultimately pit nation against nation and destabilize the already fragile international monetary system.

Washington officially supports a strong dollar. But its policies suggest otherwise. To avoid this destructive cycle, it is critical that the Fed and the Obama administration find the courage to end easy money and the accommodation of ever-larger budget deficits. This certainly won't be easy, but the road to global economic recovery must ultimately be paved with both fiscal and monetary discipline in the US - not with Great Depression-style competitive devaluations.

Peter Navarro is a business professor at the University of California-Irvine, a CNBC contributor, and the author of "Always a Winner: Finding a Competitive Advantage in an Up and Down Economy."
2:12 pm est 

Sunday, November 15, 2009

Weekly Newsletter -- Week Ending Nov 21, 2009
Always a Winner Strategies


Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  America’s appetite for cheap Chinese goods is as strong as its political will is weak.” 
Week Ending Nov 21, 2009                              Volume15, Number 20               


This Week: Declare Thyself Ye Bastard Trend!

Stock market trend: Too uncertain to call

Market Pulse

Two weeks ago I called a market top, and the market proceeded to move up.  In response, I covered my net short positions and remain in cash.  I continue to ponder whether I was too early in my call or flat-out wrong.

To ponder this with you, some first principles here: (1) Speculate, never gamble; (2) the stock market is a leading indicator of the economy; (3) Use both technical and fundamental analysis to identify the trend of the market, a sector, or a stock.

On (1), right now, the U.S. stock market remains close to a coin toss on a bullish or bearish direction.  Therefore, a fully invested long or short position right now is a gamble with close to 50-50 odds rather than an intelligent speculation.  Therefore, it is still better to be in cash than eke out a few percentage points either way at the resumption (or break) from trend.

On (2), the stock market remains a gamble because of continued uncertainty over the viability of the economic recovery.  Both Europe and the U.S. face the same issue: Will consumers follow through on a recovery that is investment-led and spurred on by expansionary fiscal and monetary policies?  As this issue resolves itself, the market trend will better reveal itself. 

In the same vein, while both the U.S. and Europe are now officially out of recession with positive GDP growth rates, they face the same issue: How long will growth remain below potential output?  If it is through 2010 and beyond, that’s a tough environment for a bullish uptrend.

On (3), the underlying fundamentals remain a mixed bag.  In the GDP equation, both business investment and government spending are highly expansionary.   Exports remain suspect, however, not just for the U.S. but for most countries around the world.  In this dimension, only China and German seem to be strong net gainers in this dimension.  Meanwhile, as noted above, the consumer is the big imponderable.

As for the underlying technicals, there are several things that define what appears to have been a bullish follow through last week.  First, volume continues to be higher on down days than up days – suggesting “distribution” in the face of an alleged resumption of the bullish uptrend.  Second, it was primarily the Dow where follow through was observed: As Market Edge notes:

Last week saw the DJIA record a series of three new recovery highs culminating in Wednesday's close at 10291.26. However, each of these moves to higher ground were non-confirmed in that the majority of the broader based indexes that we follow failed to follow suit. In fact, the only index that also posted a new recovery high was the S&P 500 when it closed at 1098.51 on 11/11/09. Such non-confirmed moves by the DJIA typically occur at meaningful tops and cannot be taken lightly. … The list of negatives continues to grow suggesting that the recent strength in the blue chips is not only suspect but probably unsustainable.

My bottom line is that I remain skeptical of this market.On other matters, President Obama is in China this week.  The oped below summarizes my views on what is the single most important issue that needs to be discussed.Why Currency Reform is the Most Important Obama-Hu Issue

As the two most important presidents in the world are meeting this week – Barack Obama and Hu Jintao – they must realize this: The pernicious economic co-dependence of the U.S. and China not only threatens the long term prosperity of both countries.  It also threatens to usher in a new wave of protectionism and derail the global economy.

In their co-dependence, China needs U.S. consumers to fuel its export-driven growth while the U.S. government needs China to finance its burgeoning budget deficits. What drives this pernicious relationship is China’s de facto hard peg of its own currency, the yuan, to the U.S. dollar.

China’s hard peg to the dollar finances U.S. budget deficits because in order to maintain the peg (about 7 yuan to the dollar), China must recycle billions of U.S. dollars back into U.S. Treasuries.   Through this recycling process, China has not only become America’s mortgage banker.  China also facilitates a dangerous and unprecedented lack of U.S. fiscal and monetary restraint.

China’s hard peg to the dollar drives China’s export-driven growth because it results in a yuan that is undervalued by more than 30%.  This undervalued yuan acts as a significant indirect subsidy to Chinese exports and a hefty tax on U.S. exports to China.  Working in combination with other Chinese mercantilist practices such as direct export subsidies, the result of China’s hard dollar peg has been both a huge and chronic U.S. trade deficit with China and a collateral loss of millions of U.S. manufacturing jobs.

Manufacturing jobs are critical to long term U.S. economic recovery because they pay more and create more jobs downstream than service sector jobs.  A revival of America’s manufacturing base – impossible until the hard peg is lifted -- is equally essential to spurring the higher rates of technological innovation necessary to boost productivity, wage growth, and the purchasing power of American consumers.

Eliminating China’s hard dollar peg is equally critical for the long term growth of the Chinese economy.  The current hard peg prevents China from developing its own domestic economy because the artificially cheap yuan depresses the purchasing power of Chinese citizens.   However, a robust Chinese consumer is critical to long term growth.  Over the long term, China will no longer be able to depend on increasingly budget-constrained European and U.S. consumers for its now export-driven growth.

It is not just the U.S. and China being victimized by China’s hard peg.  As the U.S. dollar has declined in value and dragged the yuan down with it, Chinese exporters have gained competitive advantage relative to manufacturers across the globe.

In Europe, as the dollar has fallen hard against the euro and taken the yuan with it, Europe’s trade imbalance with China has reached record proportions.  Moreover, sluggish growth is forecast through 2010, in large part due to sluggish exports.

 China’s hard peg has likewise taken a harsh toll on many Latin American countries and their export industries.  The reaction has ranged from capital controls in Brazil to repeated currency interventions in countries from Columbia to Peru to halt the slide of the dollar and yuan.

The case of Peru is instructive.  As the most avowed free trader in Latin America, Peru has opened up its markets and signed free trade agreements around the world.  In the process, as the U.S. dollar and yuan have fallen, Peru has lost 75% of its local apparel and textile market to the Chinese – a key source of employment in a country renowned for its cotton.

Most broadly, the failure of President Obama to directly address the issue of currency reform with China now threatens to usher in a new wave of global protectionism.  Indeed, even as the Obama Administration has twice now refused to brand China a “currency manipulator,” it has approved steel tariffs on key manufactured goods from China such as tires and steel pipe.

In ducking the currency manipulation question, Obama has effectively outsourced trade policy to individual American industries now under siege from China.  The likely result of this “second best solution” to reforming U.S.-China trade relations will be a flood of new dumping complaints from American industries, a dizzying round of new tariffs and countervailing duties, and the predictable retaliation of China. 

The global economic recovery must inevitably stall without the revival of the American manufacturing base, the emergence of a robust Chinese consumer, and the vitality of export industries in countries around the world.  The stall will come all the more quickly if a full-blown trade war breaks out.    For all of these reasons, there is no issue more important than currency reform as Presidents Obama and Hu sit down in Beijing this week to discuss the future.  

Peter Navarro is a professor at the Merage School of Business, UC-Irvine and author of The Coming China Wars. www.peternavarro.com   
11:00 am est 

Saturday, November 7, 2009

Weekly Newsletter -- Week Ending Nov 14 2009
Always a Winner Strategies


Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  America’s appetite for cheap Chinese goods is as strong as its political will is weak.” 
Week Ending Nov 14, 2009                              Volume15, Number 19               


This Week: Top This

Stock market trend: Likely market top reached

Market Pulse

Last week, I called a market top; and the Dow Jones industrial average proceeded to reel off a 3.2% gain. There are a couple of important observations to make about this market action.First, the tape never lies so it's important to be flexible when the market moves in the direction that you do not expect. While I entered last week slightly net short, I had a trailing stop loss on my major short position TWM and as the market rallied, I was able to close that short position and still preserve some my profits from the preceding week.Second, the fact that the market rallied does not mean that I'm ready to give up on my call that a market top has been reached. As we enter this week, the Dow will open at 10,023. This is still slightly below the actual market top, which was registered at 10,092 on October 15. It will take a sustained push through this level for me to give up on my market top call.In this regard, while it's interesting to note that the market rallied last week, the underlying technical indicators of the market continued to deteriorate. This passage from Market Edge is particularly telling:

Seldom is the case that the DJIA can muster much of a rally in the face of the numerous negatives that currently exist. In fact, the only thing that the market had going for it at the start of the week was that all of the major averages were in an oversold condition. The fact that there wasn't much improvement in the technicals last week makes the move suspect and probably unsustainable.

The list of negatives continues to grow suggesting that an across the board decline is still in the cards. The CTI remains negative at -04 as Cycles A, B & C are generating negative values. While a reset is projected to occur in the next couple of weeks, the current configuration typically results in a meaningful decline. The very weak Momentum Index indicates that all of the broader market indexes are down much more on a percentage basis than the DJIA, which is usually a precursor to a market decline. Also, as of the close on 10/30/09, all of the major averages with the exception of the DJIA, had closed below their 50-day moving average for the first time since July. This broad based weakness is also reflected in the number of stocks with a 'Long' Market Edge Opinion, which as of 11/05/09 has fallen to 1772, down from 3029 in late September 2009. Those with an 'Avoid Opinion' have increased to 1523 from 306 in September. Finally, volume on down days continues to outpace volume on up days, which is considered to be negative divergence and yet another bearish condition.

In considering whether a market top has been reached, it's useful to examine which economic indicators the market responded last week positively to. One important bright spot was a jump in the ISM Manufacturing Index. It jumped to 55, which is the highest reading since April of 2006. This was a sign that the ongoing investment-led recovery continues to gather some steam. Moreover, other countries around the world experienced similar improvements in their manufacturing indices.A second indicator that the market responded to was a significant jump in productivity. Conventional wisdom here is that increases in productivity translate into higher profits and therefore into higher stock prices.Equally important was the "dog that didn't bark." A rise in the unemployment rate to double digits didn't seem to faze the markets. It should be noted here, however, that the market probably should've reacted more to this number because that unemployment rate rose despite the fact that the labor force actually contracted. Moreover, the average work week remains at a record low, which means that the US labor force is significantly underemployed -- and therefore not generating as much purchasing power in the form of wages than it otherwise would.Going forward, the same critical question remains: will consumers step forward and begin buying all the inventory that manufacturers are building on the shelves as part of this investment led recovery?  There was at least some optimism in the last retail sales report which was a bit stronger than usual. That said, these cautionary words from the Dismal Scientist website about that retail sales report suggests that the long-awaited consumer follow-through may fall short:Sales growth excluding autos came in stronger than expected, and very few segments reported sales declines. This suggests that consumers are becoming more optimistic about economic conditions. That said, it is hard to see how this level of growth can be sustained. Wage income is not growing appreciably, although declines have ended. Wealth is substantially below its prior levels, although some of the pressure may have been removed by recent increases in equity and house prices. No further tax cuts or increases in government payments are legislated, although past actions continue to support disposable income. Asset income is still falling, although with the recession over, there are reasons to believe declines may be nearing an end. The bottom line, however, is that spending appears to be on a somewhat firmer footing than anticipated. The other thing that was interesting to note last week was a sharp jump in the price of gold. The truly interesting aspect of this jump is the news that the Bank of India had sold a huge sum of dollars in exchange for bullion, essentially betting on a continued weakening of the dollar. It appears that other central banks around the world are likewise dumping dollars for goal; and this goes a long ways towards explaining why gold is in such a strong bullish uptrend.The bigger message here, amidst all the talk about the euro or some other currency replacing the dollar as the world's reserve currency, is it may not turn out to be a currency after all that replaces the dollar. We may, in fact, go back to a de facto gold standard because there is no clear paper alternative to the US dollar. Betting long gold and short the dollar would seem to be a decent bet these days.My bottom line for this week is that my call of a market top remains in play. However, last week's market action eroded some of the foundation for that call; and right now being either long or short the market seems to me to be more of a gamble than a speculation. Ergo, I am now completely in cash and will only get back in the market once the prevailing trend reveals itself one way or the other.In closing, I found a kindred spirit quoted in this week's Barron's and I'd like to share with you that paragraph. These words are from Robert Prechter and he accurately captured the same strategy that I've been advocating in 2009:While the stock market enjoyed a "bear-market rally" after extreme pessimism gripped the market in February, when Prechter says he advised clients to cover shorts and buy, that ended in October. Now, he suggests sticking with cash, as in short-term Treasury bills yielding fewer basis points than the fingers on your hand.Yield can be the worst grounds for an investment decision, he assets. Prechter recalls that in 1981-82, when he argued equities could increase five-fold from the Dow's level of 800, the response was "how can you buy stocks with T-bills yielding 15%?" Now, he contends near-zero on safe cash is better than the chance of minus 40%.
7:01 pm est 

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DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

DISCLAIMER: The newsletters and blogging on this page are written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

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