Wednesday 25 March 2009

My fortunes rise and fall with the market

Having pulled the daily market closing data to update my EW Timing Indicator I plotted the daily market movements so far for 2009 against my daily net worth figures. As expected, my NW moves in lock-step with market movements, and a plot of net worth against the Australian All Ords index shows a linear relationship with a correlation coefficient of around 0.89 - I suspect the correlation would be even higher except that I sold off about 25% of my stock portfolio a couple of weeks ago. That change is visible in the second chart which plots both the All Ords Index and my Net Worth over time. The NW slope back up during the past two weeks has been less than the market, which means that unless I reinvest in the market as it recovers (and my gearing levels drop to more reasonable levels) I wouldn't get back to my previous maximum net worth if the market reaches it's previous peak.

According to the fitted linear relationship, each one point increase in the All Ords index boosts my net worth by around $175. Which explains why it was a lot more enjoyable watching the market rise from 2003-2007, than it has been watching the "Great Recession" take it's toll over the past 18 months.

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Dumb and Mrs Dumber

Last year I saw the CEO of Bris Connections on a nationally televised business show answering questions about the risk of "mom and dad" investors buying the partly-paid shares in his company for only a few cents, and not realising that there were two $1 calls due on the stockholders in the next year.

Sure enough, there are now many investors crying foul and trying to sue all and sundry for not saving themselves from their own greed and/or stupidity. For example, one couple bought 200,000 of the shares for only 0.3c each (total outlay $600+$19.95 brokerage), They are soon due to pay up the first $290,000 call on their shares, which would allegedly cost them their home (presumably because they could be sued if they don't pay the call amount, and their only asset is their $450,000 house).

Now, I must admit I find their claim of total ignorance a bit hard to swallow. The relatively large brokerage cost on a $600 parcel of 0.3c shares and the daily volatility of these shares suggests that this was a purely speculative gamble, rather than a long-term investment. And despite their claims that the online brokerage site didn't "warn them" that they would have to pay another $2 per share when the calls fell due, they would have seen that that shares were partly paid when they placed their order.

Anyhow, there was plenty of publicity (such as the CEO interview) to ensure that the calls due on these shares were public knowledge. It appears to be just another case of greedy investors taking a punt on a highly risky investment, and then trying to sue anyone involved in the transaction that has big enough pockets (usually a bank).

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Tuesday 24 March 2009

Is that the end of the tunnel, or an on-coming train?

I recently posted about a experimental market timing indicator I think may help me execute "dynamic asset allocation" in the future, rather than just employ a simple "buy and hold" investment strategy.

In response to that post, Chris has asked

"with the recent rally, are you getting close to a buy trigger?"

My answer is, yes, the data is getting close to my trigger conditions - today the market adjusted close was above the current trigger level of 3422 for the first time. According to my current version of the model, if it closes at or above 3422 for another four days in a row the bear market has bottomed out according to the "EW indicator" ;). I don't actually have any free cash to invest (unless I wanted to boost my margin loan LVRs back above 90%!), so all it will mean to me is that I dollar cost average my superannuation contributions into the Vanguard High Growth Fund as soon as they are contributed by my employer, rather than accumulating some cash.

I noticed that today Mark Mobius (a prominent investment manager with a cool surname) also "called" the start of the next bull market. I'll give it another four days to make sure ;)

It's funny how the market may have bottomed out just as I was dumping a large portion (around 25%) of my stock portfolio! I seem to have reasonably good "insight" into the market, but absolutely no ability to make profitable use of that knowledge.

Perhaps I just have an inordinate amount of "bad luck" when it comes to investing - if I'd rolled over my index put options back in Dec '07 and was now sitting on a pile of cash ready to invest close to the market bottom, I'd look like a genius. Instead, the average annualised ROI on my total investment portfolio (including non-stock investments) since 2003 is currently just under 0%pa!

Date Adj Close*
23-Mar-09 3,483.10
20-Mar-09 3,405.00
19-Mar-09 3,416.80
18-Mar-09 3,386.20

data from

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Friday 20 March 2009

The Story of Story and Clark Pianos

Having just bought a second-hand 1970 Story and Clark piano, I was interest in learning a bit more about the company that had made my piano. It turns out that Story and Clark has a long and interesting history in piano manufacturing, and is still being used as a piano brand name after the company changed ownership several times towards the end of the twentieth century.

Story and Clark was founded in 1884 by Hampton L. Story, his son Edward H. Story and Melville Clark, an expert reed-organ builder. Story senior had started out working in a music store for $50 a month and saved enough to buy out the principal in 1859. He joined with various piano makers to start manufacturing Story and Powers pianos in 1862, then Story and Camp pianos and organs in 1868, before finally establishing Story and Clark pianos in 1884. The Story and Clark business thrived and opened a factory in England in 1892 and another in Germany in 1893.

Clark left the firm in 1901 to form his own company, and Story and Clark pianos moved to a new factory in Grand Haven, Michigan. Despite surviving the Great Depression and increasing sales during the post war years, the factory was eventually closed in 1984 and has since been redeveloped into over 60 condominiums priced from $159,00 to $795,00. The Story and Clark piano business had been sold to the Lowrey Organ Company in 1962, and sales slowly declined during the 1970s. When the factory closed in 1984, Lowrey split the piano and electronic keyboard businesses and sold them to different investors. In 1992 S&C pianos became a division of the Classic Player Pianos Corporation in 1990. In 1993 it was taken over by QRS Music Technologies, the descendant of the company founded by Clark in 1900! Pianos with the brand Story and Clark are still being produced, but are no longer manufactured in the US.

Story and Clark pianos can be dated by the serial number ranges listed below, with the numbers indicating the last piano made each year:

1895 1900
1900 5335
1901 7100
1902 9100
1903 11400
1904 14000
1905 15600
1906 18400
1907 21400
1908 24100
1909 28900
1910 30700
1911 40000
1912 43600
1913 47000
1914 50200
1915 53200
1916 58000
1917 62300
1918 67000
1919 72300
1920 78800
1921 84000
1922 89400
1923 95000
1924 101200
1931 129100
1932 130000
1933 131100
1934 132400
1935 134000
1936 138000
1937 142000
1938 147000
1939 152800
1940 160000
1941 168000
1942 172000
1943 173000
1944 war
1945 war
1946 177000
1947 180000
1948 190000
1949 200000
1956 265000
1957 272000
1958 282000
1959 294000
1960 307000
1961 321000
1962 335000
1963 349000
1964 364000
1965 379000
1966 393000
1967 407000
1968 421000
1969 435000
1970 449000
1971 463000
1972 477000
1973 491000
1974 505000
1981 582627
1982 591528
1983 609023
1984 closed
1985 closed
1986 closed
1987 closed
1988 closed
1989 closed
1990 700001
1991 700420
1992 701280
1993 701970
1994 702324
1995 703128
1996 703629
1997 705400
1998 707000


'The Piano: An Encyclopedia' By Robert Palmieri, Margaret W. Palmieri. Routledge; 2 edition (2003). Page 382

'Pianos and Their Makers' By Alfred Dolge. Dover Publications (1972). Page 376

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Wednesday 18 March 2009

We bought a 'new' piano

Having completed his fourth year of group piano lessons with Yamaha music last year, DS1 is now getting private piano lessons (0.5 hrs for $33 each week) and studying for his AMEB 1st Grade 'Music for Leisure' Pianoforte exam in August. I decided it was about time we bought a real piano for him to practice on. I already own a small Palings (rebranded Kawai) 'Grand' piano my mother bought for me twenty years ago, but it was too large for the house we moved into six years ago and is currently stored at my parent's farm house about three hours drive from Sydney! Although the electronic keyboard DS1 has been practicing on has a 'touch' mode, it isn't really anything like the feel of an acoustic piano (or good quality electric piano), and he has a bit of trouble adjusting when playing his pieces on his teacher's Yamaha Grand piano during his lessons. DS1 is pretty keen on the piano, and enjoys doing his 30 minutes practice each day, so I'm happy to spend some extra money on a decent instrument.

I was planning to spend around $1000-$2000 or less on a second hand piano, and asked my father to keep a look out for any bargains. There are lots of Yamaha U3's around for $2,500 or more, but I was hoping to find something a bit cheaper that is in good enough condition for DS1 (and later on DS2) to practice on. I found an advert in the Trading Post online for a 1970 Story & Clark piano this afternoon, and sent my father to have a look if it was any good. It looked nice enough in the online photos and was for private sale asking $800 or so. My father thought that it was in quite good condition, so I took DW and the kids to have a look this evening after DS1's Judo lesson and bought it for $650.

It will cost about $180 to have piano movers take it to our house next Monday, and although it seems reasonably in tune it will need a tune up and some minor maintenance work fairly soon, but I expect the total cost will still come in under $1,000.

Since DS1 and DS2 will probably spend around 6,000 hours practicing on this piano over the next 15 years or more, it seems a good investment. Especially compared to the cost of lessons over that time, which will probably add up to more than $40,000! Also, I'll have a chance to brush up on my piano technique.

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Friday 13 March 2009

Sell Low, Buy High?

Last week I decided to sell off around half the stocks remaining in my Comsec and Leveraged Equities margin lending accounts. They were mostly smaller companies in which I had small positions, adding up to around 25% of the value of the stocks in my geared equities portfolio (I haven't sold off any of my managed fund investments yet). The proceeds for the LE sales will sit in the linked Cash Management account until the end of June, when my fixed-rate loan period ends. At that time the total margin loan amount for this account will drop from around $170K to around $70K. The extra cash will reduce the margin utilisation from 98% back down to around 93%, and as the cash value will remain constant, any further market declines shouldn't generate a margin call on this account. The stocks sold off from the Comsec account reduced the net loan amount, as the proceeds generate a negative variable loan amount which partially offsets the fixed loan amount (interest pre-paid until June). I probably should do the paperwork to setup a cash management account linked to the Comsec margin loan account, as otherwise I don't get any interest for the negative variable loan debt.

The stocks that I sold were the ones that would be most affected by a recession in Australia - entertainment stocks, retailers, one steel maker and a construction company - so it may be just as well to off-load them now. Of course, it would have been much, much better to liquidate my Leveraged Equities account back in 2007 when I was seriously thinking about reducing my margin lending accounts and investing via my SMSF instead.

Overall, my 20-year experiment with gearing has been a disaster. As happened last time (in the 90s), the use of gearing has meant that I am unable to buy into the market at the bottom (indeed, I'm again being forced to sell stocks when the market is down). I had thought that this time around my gearing was reasonably conservative (only using 50%-60% LVR, rather than the maximum 80% as the market rose), but the 2008-9 bear market has exceeded my "worst case" scenarios of the usual 20%-40% drop during a bear market. When the market does eventually start to rise again, I won't be maintaining the current 90%+ LVR levels by increasing my borrowings, so even if the market regained it's previous peak my equity wouldn't fully recover.

The scope of my stock losses during the 'Great Recession' shows that my strategy of keeping gearing levels at around 60% LVR during bull markets and then simply holding on and riding out a "typical" 20%-30% bear market was flawed. It didn't have a contingency for a severe recession (well, it did in the form of my Index Put options, but letting them expire in Dec 07 negated that strategy). So I'm working on a revised strategy that will employ dynamic asset allocation to reduce my gearing levels during future bear markets. The trick is to get the timing of such reallocations correct. Many pundits say that 'timing the market' is impossible (assuming random walk/efficient market theory holds), and that examples of successful timing can be attributed to luck.

A book I read a few years ago suggested selling off stocks that had broken their up-trends and dropped by 10%, thereby limiting losses during bear markets, could produce superior returns to simple 'buy and hold' strategy. I'm trying to adapt that theory to help avoid losing too much in any future severe bear markets. My current model is to sell off my geared stock portfolio when the 60-day moving average closing price falls more than 10% below the high attained since the last 'buy' signal. The 'buy' signal (to initially invest, or to reinvest after exiting the market) would arise when the market index daily close had risen 10% above the low reached since the previous 'sell' signal, and stayed there for at least 5 consecutive days. So far back-testing with daily data for the All Ords since 1984 suggests that using these signals to time strategic asset reallocations would have moved you out of the market relatively early in a bear market phase (and without too many false sell signals), and got you back into the market when it had bottomed out. The model did fail with the current 'Great Recession', as it signalled a 'buy' in May 2008 (when the market appeared to have bottomed out), only to signal another 'sell' in June after the market had continued to slide. But mostly using the model to time exits and reentries into the market would have restricted losses during bear markets to around 20%, which would have produced superior returns to 'buy and hold' in about 75% of bear markets. Overall it would have improved my ROI considerably since I started investing in stocks in the early 80s. I could tweak the parameters of this model to eliminate the false 'sell' signal in 2008, but optimising for historic data doesn't mean the model would perform any better in future periods. Keeping models as simple as possible, and retaining some common sense justification for what the parameters are, is usually more likely to result in a reliable model.

If the market doesn't drop too much further I'll retain my remaining current direct stock investments, and aim to slowly pay off my margin loan balances over time. I'll also keep our future superannuation contributions sitting in cash until 'the model' gives a buy signal - currently that would be the All Ords Index closing above 3422 for five days in a row. I may then start to use some leverage within our Self-Managed Superannuation Fund investments - either via buying Comsec CFDs for the market index (if there's a suitable CFD available), or else by investing in a geared stock fund such as the one run by Colonial First State (providing the fees aren't too high). Otherwise I'll just start moving the accumulated cash into the Vanguard High Growth Index Fund.

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Thursday 12 March 2009

We've been stimulated!

Today DW received some of the government's economic stimulus payments - a $950 "back-to-school" bonus for DS1, and a $900 "single income family bonus" (DW earns little taxable income working 2 days a week and making salary sacrifice contributions into her superannuation account).

This money won't have much of a stimulus effect on the Australian economy though - DS1 will use the money to help fund his annual $1000 contribution into his retirement savings account (RSA), and thereby get an additional $1500 government co-contribution into his retirement account. So this $950 of stimulus payment won't be getting spent for another 60 years or so.

And we immediately used the other $900 stimulus payment to pay off some of our non-tax-deductible home loan principal. That will help pay off our home loan a week or two earlier than otherwise, so I supposed we may spend a bit extra when the home is paid off in 20 years or so...

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Wednesday 11 March 2009

Time to play the evil landlord

It's been well over a year since I last did the 'annual' rent review for our investment property. Today the latest official rental statistics were available online from the NSW Dept of Housing, and our tenants won't be happy with the news. According to 'Table 3:Weekly rent for new bonds- Greater Metropolitan Sydney -Separate houses - 3BR, Warringah Shire' for the Dec '08 quarter, the average weekly rent for the bottom quartile of new rental agreements was $571 per week. That's an increase of 16.4% compared to when I last adjusted our rent (based on the Sep '07 figures). The last rent increase for our rental property was also in double digits, so our tenants negotiated for the rent to be raised in two stages, with the full rent increase only coming into effect after a six month delay.

This review we've decided to again raise the rent for our property by less than the market average, but it's still a hefty 15.5% rise from the current $450 per week to $480 from 1 June and then to $525 from 1 Dec. I'm sure our tenants will complain about this rent hike and try to negotiate a smaller increase, but I really don't want to let the rent fall too far below prevailing market levels. Even when the full increase comes into effect in December the rent will only be 91% of the average rent for similar properties in this area as of last December, and I'm sure rents will have risen further by the time the increase comes into effect at the end of the year, given the low vacancy rates in Sydney, the slump in new home construction, and record high immigration rates with Sydney the destination of choice for the majority of immigrants to Australia.

When we first purchased the property we set the rent based on expert advice from local rental property managers, and the rent was 98% of the relevant market average. Since then our rent has slowly fallen behind the curve, as shown below. Consistently getting 10% less than market rent is the equivalent of having the property vacant for 5 or 6 weeks of the year.

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. Copyright 2006-2008

Wednesday 4 March 2009

Arghhh! When Fine Print Attacks

Today I spent an infuriating hour on the phone trying to recover over $100 from two cases of fine-printitis. The first one came about when I checked my mobile phone bill email. Rather than the usual $28 monthly fee for DW and my mobile phones, the February bill was over $60. I quickly scanned through the items and found that there was $40.50 charged for 9 'premium' SMS messages to DW's mobile number. I called customer service to complain about this charge, thinking it must be a billing error since we never use SMS, let alone "premium" SMS, whatever that is.

The CSR didn't help much, simply telling me that the premium SMS service was from a third party, so they couldn't cancel the charges. She suggested I call the 'help' number listed against the SMS items. When I called the 'help' number I simply got a recorded message prompting me to enter the mobile phone number in question. Since I didn't think we had signed up for this service in the first place I didn't want to enter our mobile number in case it just triggered an avalanche of other spam SMS messaging.

After searching the internet for the 'premium' SMS number in question, I found a forum thread containing numerous examples of people who had similar problems with unwanted SMS messaging services being billed to their phone account. I did find a different customer service number for the SMS messaging service, but a call to that number also just got a recorded message (after waiting on hold for 10 minutes for 'the next available operator').

Having wasted half an hour trying to contact the SMS provider, I called back my mobile phone service to complain (and threaten to call consumer affairs). This prompted my mobile phone service to call the SMS company themselves, and soon after a got a conference call back from both the mobile phone and SMS CSRs. It turned out that DW may have provided her mobile phone number on 30 Jan when she signed up for a "Free" $2,000 prize draw on the internet. The mobile phone number was required to SMS her a 'confirmation PIN number' for the contest - but DW didn't read the fine print that by entering the "free" competition she was also signing up for a $4.50 per message SMS service! She'd been getting (and ignoring) the SMS messages that had been coming every second day, thinking that they were just spam!

The conference call wound up with the SMS company asking my mobile phone company to email them requesting a transcript of the internet log showing when we subscribed for the premium SMS service. My mobile phone service will then forward the email to me.

I suspect that we'll end up having to pay the $50 or so in SMS charges accumulated before the SMS 'subscription' was cancelled today. I asked my mobile phone company to block the SMS facility on our account, and I may write to consumer affairs to complain about this scam.

The second case of costly fine print came later in the day when I received a call from NetTab (an online betting service) regarding the 'forgotten password' request I emailed on Monday. I had signed up for online betting way back in 2002 in order to bet a few dollars on the Melbourne Cup race, putting $50 into the account. After the initial wager I hadn't been able to log in to the account and had received a letter saying that the account wasn't 'active' until I provided identification at one of the TAB outlets. Since I'm not a regular gambler I put off visiting a TAB office with my paperwork for several years until another Melbourne Cup Day was approaching. When I finally had my identification confirmed, I was told not to go online and activate the account until I wanted to place a bet, as otherwise I start being charged a monthly fee.

When I got the call from NetTab today, I was informed that my account had been closed in 2007, after my $50 had been totally consumed by a monthly $5.50 "inactive account" management fee! I think it is absurd to be charged a monthly fee for not using an account that I didn't have access to until my ID had been provided, and I also don't recall reading anything about this fee when I originally joinged in 2002. In the end I talked to a supervisor who promised to try to locate a copy of the Terms and Conditions that were in effect when I joined online in 2002, and mail them to me. I doubt that I'll get my $50 refunded, but I suspect that the customer service call cost NetTab more than $50, which is some small compensation.

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Tuesday 3 March 2009

Wealthy Pensioners to Pay the Price

As reported by the SMH and elsewhere, it appears likely that eligibility conditions to receive the pension in Australia will be tightened in order to cover the cost of raise the rate for Single pensioners to 67% of the Couples Pension rate (it's currently 50%).

The driver for these changes are, as usual with a Labor government in power, "Equity" considerations. The current pension assets and income tests mean that some relatively wealthy seniors are being paid a pension. Labor is firmly against the idea of "middle class welfare".

Ignoring the fact that the "wealthy pensioners" are the same cohort that probably paid nearly all of the taxes that provided the pension to the previous generation of pensioners, I have to question the fairness of any "equity" argument that only looks at the current snapshot of people's situation.

A moral, compassionate society should obviously care for the paupers, widows and orphans, sick and demented that would otherwise end up starving and homeless. However, the provision of pensions is extended to a much wider group of people, raising the question of who actually 'deserves' to get a pension. As is often the case, equality of opportunity is being confused with equality of outcome.

Consider the hypothetical cases of Bob and Bert, two 70-year old retired bus drivers. Both are married, have two grown up kids, and rely on the pension for their retirement income. However, Bert is living in rented accommodation, and has a much lower standard of living (less disposable income) than Bob, who is living in a modest house with no mortgage. The value of Bob's home is currently not included in the assets pension test, but that may soon change, severely reducing or possibly eliminating his pension income.

However, is this really fair? Bob worked to 45 years, paid his taxes, and lived a fairly frugal lifestyle so he could afford the mortgage repayments on his family home. At the same time, Bert has always rented his accommodation, and enjoyed consuming his higher disposable income while he was working. Although they had exactly the same take-home pay, Bert was dining out and going to the theatre each week, while Bob was drinking beer in front of the TV and worrying about his mortgage repayments. For some reason, Labor thinks it's "inequitable" that Bob can now afford to dine out and go to the theatre using his pension income, while most of Bert's pension income is being spent on his rent.

To my mind, since both Bob and Bert earned the same income and paid the same amount of taxes over their working lives, they are both equally entitled to receive a pension. Having blown your income at the race track or down the pub very Friday night should not make someone more 'deserving' of a pension.

Australia already has moved some way towards a self-funded retirement system, with compulsory superannuation ensuring that in future generations the Bert's and Bob's of the world will have both accumulated similar retirement savings and neither will require (or get) a government (tax-payer funded) pension. In the meantime, I can't see the justification to take money out of Bob's pocket and give it to Bert.

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Monday 2 March 2009

Sold more stocks to avoid a margin call

Today's 3% drop in the Australian stock market brought my Comsec margin loan account close to exceeding the 5% "buffer". If you get a margin call you have to sell shares (or deposit extra cash) to bring the account's margin utilisation back below 100%, not just within the 105% buffer zone. So I decided to sell off my CBA (Commonwealth Bank) and IFL (IOOF Investments) holdings.

About the only good thing about being forced to sell of stocks is that the continued bear market means that they are currently priced below the price I realised when I sold them off.

2 Mar 2009 Sell 1,300 IFL $ 2.730 NOW: $ 2.71
2 Mar 2009 Sell 130 CBA $28.780 NOW: $28.51
20 Feb 2009 Sell 4,685 APA $ 2.870 NOW: $ 2.58
20 Feb 2009 Sell 251 AGK $13.320 NOW: $13.29

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Net Worth Update: February 2009

My net worth as at 28 February decreased by another -$34,351 (-5.59%) during the month to $580,214 (AUD). This month the decline was mostly due to continued losses in my geared equity investments (down by -$41,863), which more than offset the slight rise in the valuations of our real estate investments (up $10,508 or 1.39%) and a small decrease in the value of my retirement savings (SMSF down -$2,510 or -1.06%). The decrease in the retirement savings was actually a lot worse than it appears on the surface - last month our account received three months of employer contributions and my salary sacrifice for that period, totalling around $13,000.

The balance of my half of the mortgage was fairly constant at -$367,863. Our monthly payments and rent from our tenant are now just enough to meet the interest only loan payments, so no further redraws are required for the time being. Hopefully by the time the economy recovers and interest rates start to rise again DS2 will have started school and DW will be able to increase her paid employment from 2 days a week to four. Next month the loan balance will drop by about $6,000 as we were able to make a one-off repayment of principal using the Family Tax Benefit "top up" payment we received when we finally lodged our tax returns for 2008.

DW has started to complain about our compact car (a 2000 model Ford Festiva 2-door), and asking when we can replace it with a second hand Subaru Forester as we had planned. Unfortunately, spending $25,000 to upgrade our vehicle looks a lot less affordable now than it did back when my NW was over $1m and I could sell off some stocks to fund such a purchase. The Festiva has only done 100,000km and is still running well, so I'll put off trading it in for several more years.

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