Morning Report: Home Price Appreciation Stalls

Vital Statistics:

S&P futures4,0419.00
Oil (WTI)77.45-0.47
10 year government bond yield 3.50%
30 year fixed rate mortgage 6.15%

Stocks are higher as earnings continue to come in. Bonds and MBS are up.

House prices fell 0.1% MOM and rose 8.2% YOY according to the FHFA House Price Index. “U.S. house prices were largely unchanged in the last four months and remained near the peak levels reached over the summer of 2022,” said Nataliya Polkovnichenko, Ph.D., Supervisory Economist, in FHFA’s Division of Research and Statistics. “While higher mortgage rates have suppressed demand, low inventories of homes for sale have helped maintain relatively flat house prices.”

The West Coast is experiencing the biggest slowdown, followed by the Mountain States. Some of these MSAs like Boise became completely disconnected from the local economy and prices will almost certainly contract to what the local economy can support.

Home prices fell 0.5% MOM according to the Case-Shiller Home Price Index. “November 2022 marked the fifth consecutive month of declining home prices in the U.S.,” says Craig J. Lazzara, Managing Director at S&P DJI. “For example, the National Composite Index fell -0.6% for the month, reflecting a -3.6% decline since the market peaked in June 2022. We saw comparable patterns in our 10- and 20-City Composites, both of which stand more than -5.0% below their June peaks. These declines, of course, came after very strong price increases in late 2021 and the first half of 2022. Despite its recent weakness, on a year-over-year basis the National Composite gained 7.7%, which is in the 74th percentile of historical performance levels. As the Federal Reserve moves interest rates higher, mortgage financing continues to be a headwind for home prices. Economic weakness, including the possibility of a recession, would also constrain potential buyers. Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken.”

Note the FHFA House Price Index only looks at homes with a conforming mortgage, which means it excludes jumbos and cash-only sales. Since we are seeing a big decline in luxury home sales, that might explain the difference between FHFA and Case-Shiller.

Employment Costs rose 5.1% YOY, according to the Employment Cost Index. Wages and Salaries rose 5.1% while benefits rose 4.9%. Given the Fed’s laser focus on wage-push inflation, this number will be somewhat concerning. That said, the quarterly gain fell from 1.2% to 1.0%. The number was below Street expectations.

Consumer confidence fell in January, according to the Conference Board. “Consumers’ assessment of present economic and labor market conditions improved at the start of 2023. However, the Expectations Index retreated in January reflecting their concerns about the economy over the next six months. Consumers were less upbeat about the short-term outlook for jobs. They also expect business conditions to worsen in the near term. Despite that, consumers expect their incomes to remain relatively stable in the months ahead. Meanwhile, purchasing plans for autos and appliances held steady, but fewer consumers are planning to buy a home—new or existing. Consumers’ expectations for inflation ticked up slightly from 6.6 percent to 6.8 percent over the next 12 months, but inflation expectations are still down from its peak of 7.9 percent last seen in June.”

More evidence of a slowing economy: Shipper UPS reported a decline in revenue in the fourth quarter compared to a year ago. CFO Brian Newman said that 2023 should be a bumpy year, although the second half should be better than the first.

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Morning Report: Fed Week

Vital Statistics:

S&P futures4,051-33.00
Oil (WTI)79.39-0.27
10 year government bond yield 3.56%
30 year fixed rate mortgage 6.15%

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are up.

The week ahead will be dominated by the Fed meeting on Tuesday and Wednesday. The Fed Funds futures are pretty much a lock for 25 basis points hike. We won’t get any new dot plots or forecasts.

In terms of economic data, we will get some housing price data with FHFA and Case-Shiller, ISM data and the jobs report on Friday. We will get earnings from Google, Facebook, Amazon, and a slew of other major companies.

Investors are going to want to see evidence that the Fed thinks it is getting some traction on inflation. Since monetary policy acts with a lag, by the time the data suggest that inflation is over the Fed is at risk of overshooting. That is certainly the fear right now, although the labor market does remain robust. The supply chain issues that drove up costs early in the pandemic have worked themselves out, and housing will disappear as a driver by this summer. A lot will continue to hinge on wage growth.

The Atlanta Fed’s GDP Now estimate for Q1 is a mere 0.7%. Note that the GDP Now estimate was significantly higher than the first estimate for Q4 GDP growth – about 60 basis points too high.

Jeffrey M. Lacker and Charles I. Plosser penned an op-ed in the Wall Street Journal about Fed policy and inflation. They discuss the use of rules like the Taylor Rule which calculate a Fed Funds target rate. Based on the inflation numbers we saw in December, these rules suggest the Fed Funds rate should be 8%. From the oped:

“While inflation readings have fallen in recent months, substantial upward pressures remain, particularly in wage-setting and service-sector prices. These present sizable upside risks, as do rates that remain below the prescriptions of historically grounded rules. If inflation persists at its current four-quarter rate of 5.5%, policy-rule recommendations for the funds rate range from 6.5% to 8% by the end of the year, substantially above what the Fed and markets are currently expecting.”

Interest rates could go much higher than the public realizes. Helping people understand the policy rules and how they inform the Fed’s thinking would be far more constructive than asking the public to decode ambiguous phrases such as “sufficiently restrictive.” Using the prescriptions of systematic policy rules would also bolster the Fed’s credibility by providing well-grounded benchmarks for how policy ought to respond to incoming data, thereby dampening perceptions that Fed policy choices—such as when to stop raising rates or when to reverse course—might be arbitrary or responsive to political considerations.”

Redfin put out a piece on how the housing market is beginning to recover. Condos and luxury properties are unpopular, but smaller properties that are well-maintained in good school districts are moving quickly. “Buyers are out there, but they’re making low offers and asking for concessions. They don’t seem ultra committed to homes like they used to. If they write an offer and they don’t get exactly what they want, they’re happy walking away. I recently heard about one seller who offered to pay the first three months of a new owner’s mortgage payment. There’s still a lot of cautiousness on both sides of the deal.”

Interestingly many sellers are reluctant to list their property because they want to stick with their ultra-low mortgage rate. Redfin noted that many of these sellers are deciding to rent their property and move up into a bigger one.

The Biden Administration is planning on releasing a Tenant Bill Of Rights, which has been drafted by community organizers and pro-tenant lawyers. It will attempt to find a way to impose national rent control. Ultimately the problem is that housing is in a dire shortage, and these measures will do nothing to increase supply – if anything expropriation of property rights will cause investors to raise the required rate of return to take into account regulatory risk, which means new investment will get harder, not easier.

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Morning Report: Some good news on the inflation front.

Vital Statistics:

S&P futures4,060-16.00
Oil (WTI)82.391.21
10 year government bond yield 3.55%
30 year fixed rate mortgage 6.13%

Stocks are lower this morning on poor earnings from Intel. Bonds and MBS are down.

Personal Incomes rose 0.2% MOM in December, according to the BEA. These were driven by increases in wages and rental income. Personal Consumption Expenditures fell 0.2%. The PCE price index rose 0.2% MOM, while the core PCE price index rose 0.3%. This was an uptick in core rate, although the annual numbers keep going in the right direction.

The goods inflation and supply chain issues seem to be in the past – remember the big chip shortage? Intel is swimming in excess inventory. Commodities like lumber are back at pre-pandemic levels. Housing inflation will stop bumping up the inflation numbers during the summer. The final leg is incomes, which have been falling for 3 months. The Fed seems to have gotten a hold of inflation and its work is largely done. Does that mean prices will return to pre-pandemic levels? No. The inflation of the past year means that prices have hit a new, higher plateau.

Consumer sentiment improved in January, according to the University of Michigan Consumer Sentiment Survey. Improvements were noted in both the current conditions index and the expectations index. FWIW, these consumer sentiment indices are heavily influenced by prices at the pump, so these numbers reflect the decline in gas prices.

Inflationary expectations fell again, falling for the fourth straight month to 3.9%. Longer-term expectations remain around 2.9% which is above the Fed’s target and higher than the pre-pandemic levels of 2.2% – 2.6%.

Pending Home sales rose 2.5% in December, after six straight months of declines. Year-over-year, transactions are still down by a whopping 33.8%. That said, it looks like the nuclear winter in housing is over. “This recent low point in home sales activity is likely over,” said NAR Chief Economist Lawrence Yun. “Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market.”

Morning Report: GDP rose 2.9% in the fourth quarter

Vital Statistics:

S&P futures4,048 16.50
Oil (WTI)81.391.21
10 year government bond yield 3.51%
30 year fixed rate mortgage 6.13%

Stocks are higher this morning after the GDP print. Bonds and MBS are up.

GDP rose 2.9% in the fourth quarter, according to the BEA. Consumption rose 2.1%, while investment increased 1.4% and government spending rose 3.7%. Inventory build particularly in the natural resource sector was a driver of the increased GDP print. Housing services (i.e. home price appreciation and owners equivalent rent) pushed up GDP while actual residential construction was a drag.

The PCE price index (the Fed’s preferred measure of inflation) rose 3.2% compared to 4.8% in the prior quarter. Excluding food and energy, the price index rose 3.9% versus 4.7%.

The Atlanta Fed’s GDP Now estimate has been out of step with the Street all quarter and I guess the Street was right. The housing services component will fade into the background as home price appreciation stagnates.

New home sales rose 2.3% MOM to a seasonally-adjusted annual pace of 616,000 last month, according to the Census Bureau. This is down 26.6% on a year-over-year basis. For the year, an estimated 644,000 homes were sold in 2022, which was a 16.4% decline from 2021. There were 461,000 homes for sale at the end of December, which represents a 9 month supply. Generally speaking 6 months is considered a balanced market, so the builders have inventory to go. This makes sense since we have seen a pretty big uptick in the cancellation rate from the builders. They will probably have to cut prices or offer incentives to move the merchandise during the Spring Selling Season which begins in the next few weeks.

Rounding out the economic news of the day, Durable Goods orders rose 5.6% in December, driven primarily by transportation equipment. Excluding transportation durable goods orders fell 0.2%. Initial Jobless Claims fell again to 186,000 an exceptionally low number. Despite the headlines about tech layoffs, we aren’t seeing any increase in the numbers. If anything they are falling. The Chicago Fed National Activity index showed the economy is still growing well below trend, notwithstanding the GDP print.

Goldman Sachs sees a 2008-style decline in 4 major cities, including Phoenix, San Jose, San Diego and Austin, TX. The bank sees declines of around 25% for these MSAs. Note that such a decline would still put them above pre-pandemic levels given the insane appreciation we saw there over the past two years.

“This [national] decline should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely. That said, overheated housing markets in the Southwest and Pacific coast, such as San Jose MSA, Austin MSA, Phoenix MSA, and San Diego MSA will likely grapple with peak-to-trough declines of over 25%, presenting localized risk of higher delinquencies for mortgages originated in 2022 or late 2021,” writes Goldman Sachs.

Morning Report: Mortgage Applications Rise

Vital Statistics:

S&P futures3,988-41.50
Oil (WTI)80.05-0.08
10 year government bond yield 3.46%
30 year fixed rate mortgage 6.17%

Stocks are lower this morning after Microsoft’s earnings missed Street expectations. Bonds and MBS are up.

Mortgage applications increased 7% last week as purchases fell 1% and refis rose 15%. “Mortgage rates declined for the third straight week, which is good news for potential homebuyers looking ahead to the spring homebuying season. Mortgage rates on most loan types decreased last week and the 30-year fixed rate reached its lowest level since September 2022 at 6.2 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Overall applications increased with both gains in purchase and refinance activity, but purchase applications remained almost 39 percent lower than a year ago. Homebuying activity remains tepid, but if rates continue to fall and home prices cool further, we expect to see potential buyers come back into the market. Many have been waiting for affordability challenges to subside.”

The increase in refis sounds great, but we are coming from extremely low levels. The chart looks like Ask Jeeves circa 2002.

We are seeing the financials increase provisions for credit losses. Capital One provisioned $2.4 billion, which was a big increase from $1.9 in Q3 and $388 million a year ago. Given Capital One’s credit card exposure this is a warning that the consumer might be facing some trouble.

In other consumer banking results, we saw increases in provisions from Ally and Synchrony as well. For Ally, provisions are back towards pre-pandemic levels.

One bank that bucked the trend was Western Alliance, which provisioned only $3.1 million in credit losses in Q4 compared to $28.5 million in Q3. Asset quality remains robust, and charge-offs are low. Given that Western Alliance has some hefty exposure to the mortgage industry, this result is encouraging.

Homebuilder D.R. Horton announced earnings this morning that missed Street expectations, as earnings fell 13%. Revenues were slightly positive. Net sales orders fell 38% and the cancellation rate rose to 27%. Backlog fell 46%. “Beginning in June 2022 and continuing through today, we have seen a moderation in housing demand caused by significant increases in mortgage interest rates and general economic uncertainty. While these pressures may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable.” The company is guiding for gross margins to fall to about 20% – 21%. This suggests that they might need to cut prices in order to move the merchandise.

Rising costs have been discouraging Millennials from buying a home, however most are accepting the higher costs and adjusting their plans accordingly. They are increasing their savings, spending more than they had hoped (which is probably typical for any first-time homebuyer), and delaying purchases. Most will simply have to come to grips with the fact that the 3% mortgage rates of the pandemic are probably not coming back, at least in the near term.

Morning Report: Activity in the private sector declines again

Vital Statistics:

S&P futures4,024-11.50
Oil (WTI)81.770.15
10 year government bond yield 3.50%
30 year fixed rate mortgage 6.19%

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are up small.

Loans in forbearance were flat at 0.7%, according to the MBA. Fannie and Freddie loans were 0.31%, while Ginnie loans were 1.45%. “For three consecutive months, the forbearance rate has remained flat — an indicator that we may have reached a floor on further improvements,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “New forbearance requests and re-entries continue to trickle in at about the same pace as forbearance exits. The overall performance of servicing portfolios was also flat compared to the previous month, but there was some deterioration in the performance of Ginnie Mae loans.”

The private sector continues to contract, according to the Flash PMI Index.

“The US economy has started 2023 on a disappointingly soft note, with business activity contracting sharply again in January. Although moderating compared to December, the rate of decline is among the steepest seen since the
global financial crisis, reflecting falling activity across both manufacturing and services. The worry is that, not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks.

Rising wage inflation will be a red flag for the Fed.

In a sign that the labor market is weakening, we are seeing companies cut temporary workers. Some of the cuts were at the bigger tech companies which are all announcing layoffs in general. Smaller companies which struggled to compete for talent during the past couple of years will probably absorb these temp workers relatively quickly. A drop in temporary worker hiring is often taken as a leading indicator for larger changes in the workforce.

About 13% of adults are planning on buying a home, a decrease from 15% in the third quarter of 2022, according to research from the National Association of Home Builders. Respondents are more interested in buying an existing home than a new one. Affordability is a big issue as 87% respondents said that they were unable to afford more than 50% of the homes in their market. This bodes ill for the Spring Selling Season, but rates have fallen substantially over the past few months, so that should help alleviate some of the affordability issue.

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Morning Report: The US Leading Indicators are flashing a recessionary signal.

Vital Statistics:

S&P futures3,9935.50
Oil (WTI)82.360.72
10 year government bond yield 3.53%
30 year fixed rate mortgage 6.20%

Stocks are higher this morning on no real news. Bonds and MBS are down.

The week ahead won’t have much in the way of major market-moving data, but we will get a few important reports including the advance estimate for GDP on Thursday and personal incomes and outlays on Friday. Earnings season picks up in earnest with a slew of major companies reporting including Tesla and Microsoft. We won’t get any Fed-speak as we are in the quiet period ahead of the FOMC meeting next week. We will get the debt ceiling kabuki theater performance as well.

The Index of US Leading Economic Indicators declined again in December, following a decline in November. “The US LEI fell sharply again in December—continuing to signal recession for the US economy in the near term,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead. Meanwhile, the coincident economic index (CEI) has not weakened in the same fashion as the LEI because labor market related indicators (employment and personal income) remain robust. Nonetheless, industrial production— also a component of the CEI—fell for the third straight month. Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023.”

Basically the labor market and consumption are the only things holding up the economy at the moment. The labor market’s strength should have an asterisk next to it given that the tightness is due to people opting out of the labor market

I published another article on Substack over the weekend, where I discussed Friday’s awful existing home sales number, did a deep dive into MBS spreads and the effect of QE / QT. Housing affordability (see the matrix below) also gets an in-depth discussion as well. A lot of the stuff I cover on The Weekly Tearsheet doesn’t really get covered in here. Check it out and please consider subscribing.

The Fed Funds futures are a lock for 25 basis points next week. A 25 basis point hike would put the Fed Funds target rate at 4.5%-4.75%, and the March futures see another 25 which would put us at 4.75% – 5%. The May and June futures see a 33% chance for another 25, and that probability gradually fades as we round out the year.

The street estimate for Q4 GDP is 2.7%, which is pretty robust, but the Atlanta Fed’s GDP Now estimate is for 3.5%. Both numbers seem high given some the ISM numbers showing contraction in manufacturing and services. Maybe some of this is inventory build which will have the effect of “borrowing” growth from Q1.

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Morning Report: Existing home sales fall

Vital Statistics:

S&P futures3,925 10.50
Oil (WTI)80.750.42
10 year government bond yield 3.46%
30 year fixed rate mortgage 6.10%

Stocks are higher this morning on no real news. Bonds and MBS are down.

Jamie Dimon sees the Fed rising rates above 5% “I actually think rates are probably going to go higher than 5% … because I think there’s a lot of underlying inflation, which won’t go away so quick,” Dimon said Thursday on CNBC’s “Squawk Box” from the World Economic Forum in Davos, Switzerland. Much of this is due to oil and China “We’ve had the benefit of China’s slowing down, the benefit of oil prices dropping a little bit,” Dimon said. “I think oil gas prices probably go up the next 10 years … China isn’t going to be deflationary anymore.”

Existing home sales fell 1.5% MOM and 34% YOY to a seasonally adjusted annual rate of 4.02 million in December. “December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates,” said NAR Chief Economist Lawrence Yun. “However, expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.”

The median existing home price rose 2.3% YOY to $366,900. That sound to me like all of the activity is at the lower price points. Total housing inventory for sale was 970,000 units. Unsold inventory is a 2.9 month supply, which is historically super-low. All-cash buyers were 28% of sales. First-time homebuyers represented 31% of all sales, which was an improvement from 28% Properties remained on market for 28 days.

Fannie Mae and Freddie Mac have updated their LLPA matrices. These will go into effect in May 2023. The main change is that Fannie and Freddie reduced the penalties for low credit and high LTV. “These changes to upfront fees will strengthen the safety and soundness of the Enterprises by enhancing their ability to improve their capital position over time,” said Director Sandra L. Thompson. “By locking in the upfront fee eliminations announced last October, FHFA is taking another step to ensure that the Enterprises advance their mission of facilitating equitable and sustainable access to homeownership.”​​

Morning Report: Housing starts fall

Vital Statistics:

S&P futures3,919-26.50
Oil (WTI)79.970.47
10 year government bond yield 3.41%
30 year fixed rate mortgage 6.08%

Stocks are lower as investors fret about the state of the economy. Bonds and MBS are up.

Housing starts fell 1.9% MOM and 21.8% YOY to an annualized rate of 1.38 million. This was a touch above expectations. Building Permits fell 1.6% MOM and 29.9% YOY. This is not surprising given how lousy the home purchase market is. KB Home announced that their cancellation rate was so large, they were halting new projects and just working on the backlog.

On the plus side, mortgage rates are down over 1% compared to October – November 0f 2022. Homebuilders are cutting prices as well, which is good news for affordability.

Meanwhile, Elizabeth Warren is agitating for nationwide rent control using the FTC and HUD as levers to cap rents. No legislation required. I don’t think rent control has ever had the effect she wants (increasing supply and lowering costs), but maybe this time will be the charm. So, who wants to build an apartment complex at a 2% cap rate? Bueller?

The labor market remains tight as a drum. Initial Jobless Claims fell to 190,000 last week, which was the lowest level since the late 1960s when we had a military draft. We are seeing more dovishness out of the Fed speakers, as Harker and Logan want to moderate the pace of increases. Meanwhile Bullard and Lester want to keep rates higher for longer.

Here is a chart of initial jobless claims from 1967 – 1970.

Interesting stat out of China: The population fell in 2022. Since population growth is one of the biggest drivers of climate change, this probably takes the doomsday scenarios off the table if it continues a trend. Instead of 30 billion people by 2100, we might only get 10 billion.

Morning Report: Homebuilder sentiment improves

Vital Statistics:

S&P futures4,014 4.50
Oil (WTI)81.411.28
10 year government bond yield 3.43%
30 year fixed rate mortgage 6.20%

Stocks are higher this morning on better-than-expected inflation data. Bonds and MBS are up.

Inflation at the wholesale level fell 0.5% month-over-month according to the Producer Price Index. This comes after a 0.4% increase in October and a 0.2% increase in December. The decline was driven primarily by a decrease in energy prices. The index was up 6.2% on a YOY basis.

Stripping out food, energy and trade services the index rose 0.1% MOM in January and 4.6% YOY. Overall, it looks like inflation is on the way down, however as far as the Fed is concerned it wants to see the labor market come more in balance.

Homebuilder sentiment rose slightly in January, according to the NAHB / Wells Fargo Housing Market Index. This is after a string of declines driven by rising interest rates. “It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.” Remember that home construction is a classic early-stage cyclical and is one of the first sectors to recover after a recession.

Retail sales fell 1.1% in December, according to the Census Bureau. This follows a decline in November. On a year-over-year basis, retail sales rose 6.0% YOY, which means it was down about 0.5% once you take into account the 6.5% rise in the CPI. This doesn’t bode well for Q4 GDP growth since consumption is about 70% of GDP. The Atlanta Fed’s GDP Now model sees 4.1% growth in Q4, though it will be updated sometime today. This just seems out of step with the data out there, but perhaps it is explained by inventory build.

Mortgage Applications rose 27% last week as purchases rose 25% and refis rose 34%. These numbers include an adjustment for the holiday-shortened New Year’s holiday however falling rates are helping things. That said we have a long way to go to get to some semblance of normalcy.

“Mortgage application activity rebounded strongly in the first full week of January, with both refinance and purchase activity increasing by double-digit percentages compared to last week, which included the New Year’s holiday observance,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Despite these gains, refinance activity remains more than 80% below last year’s pace and purchase volume remains 35% below year-ago levels. Mortgage rates are now at their lowest level since September 2022, and about a percentage point below the peak mortgage rate last fall. As we enter the beginning of the spring buying season, lower mortgage rates and more homes on the market will help affordability for first-time homebuyers.”

Industrial production fell 0.7% in December, and manufacturing production fell 1.3%. Capacity Utilization fell from 79.4% to 78.8%. Again, I have to look at the Atlanta Fed’s estimate and I don’t see how this data comports with 4.1% GDP growth.

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