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Archive for the ‘Business – General’ Category

2016-election

Well, there it is. The candidate that no one would give credence to has won the Oval Office, and in about two months he’ll take the helm on the bridge on the S.S. United States. There are lots of things that can be said about the view off the bow, but we’ll limit this post to the view from the stern. There will be no reaching for apocalyptic metaphors from Bronze Age Biblical passages.

The roots of Trump’s victory date back to the major events of the 2007-09 Great Recession. The people have rejected, decisively, the power of the Wall Street-Washington Axis. Until last night, the United States was not a democracy; it was a corporatist state, one in which the unproductive financial capitalists of Wall Street ventriloquized Washington, D.C. and ran the country by themselves, for themselves.

Just look at the wake our ship of state has made. The U.S. Gov’t. made sure that all the AIG executives got their bonuses, even though it was they who almost drove the global economy into a bottomless abyss. The megabanks all got bailed out on the taxpayers’ dime, even though they had to be bailed out because they’d spent years packaging and selling trillions of dollars of collateralized debt obligations that they themselves didn’t understand, and knew were worthless. Meanwhile, those same taxpayers who bailed out Wall Street lost their jobs, then lost their homes, and, of course, lost their health care coverage.

For decades, the Wall Street-Washington Axis preached the gospel of Rugged Individualism and The Free Market, which was all a lie. Goldman Sachs perfectly exemplifies why: when the market turned on Goldman Sachs during the Great Recession, Lloyd Blankfein, its CEO, called his good old buddy, old chum, old fellow alumni Hank Paulson, who just happened to be U.S. Treasury Secretary. And, presto change-o, Goldman Sachs became a bank holding company with access to the Federal Reserve cash window before the weekend was over.

See? It pays to have friends in high places.

The Americans who voted yesterday don’t have friends in high places, and they’re sick and tired of seeing the country run for the exclusive benefit of those who do. Washington in 2007-09 refused to countenance an economic reckoning for Wall Street because that would have affected their compatriots (and the campaign donor class) in the banks. But in economics, one link forges the next, and the reckoning that should have happened in the markets was translated to the political sphere. Think Tea Party. Think Occupy Wall Street.

And not one banker ever went to prison. In fact, the best thing that happened to Wall Street during the Great Recession, the guy who did the world’s biggest favor for the banksters, was Bernie Madoff. Bernie may be the Platonic Form of Ponzi Schemer, but he had no connection whatsoever to the Wall Street madness that brought on the Great Recession. Still, he became the face of it.

Places like Westchester County, NY, and Fairfax County, VA, came out of the crisis more prosperous than they’d ever been. But it you were not within that Charmed Circle because you lived, say, in a place the Wall Street-Washington Axis labeled “Flyover Country,” you were financially doomed. The elites were not affected by the downturn. Out of sight, out of mind.

The Wall Street-Washington Axis sold themselves on the basis of merit, they convinced the country that they knew best. “If you let us bail out the banksters, we’ll be back to the boom times in no time!” But that didn’t happen. They were wrong. Take Alan Greenspan, once viewed as the Grand Poohbah of All Economics, given to cryptic utterances that verged on the unintelligible. Turns out that he was just an old Ayn Rand fanatic, a rooster claiming credit for the dawn.

These examples could be multiplied. The mistake of Establishment politicians was to think that people would just forget about all that. The political legitimacy of the Wall Street-Washington Axis is based on alleged merit. When that merit is shown to be a complete falsehood, their political legitimacy dissolves.

More than anything else, the Great Recession and how it was handled threw a decisive advantage into the scale on the populist side. Whatever faults Trump may have, he was sharp enough to see this when everyone in the Wall Street-Washington Axis did not. Sanders saw it too, which accounted for his relatively successful campaign, which also surprised the media.

I don’t attribute Hill’s loss to the private email server business, which most people didn’t understand, much less follow. Nor to Benghazi, a word that practically became a Republican mantra. Nor is it the trust/distrust factor.

No, the real issue is that, no matter how hard she tried, Hillary could never portray herself as an “agent of change,” to use an overused term. Forget exit polls, forget college-educated or not. All that’s just trivia and beside the point. She represented continuity with the unacceptable status quo, continuity with a way of governing that the American people want smashed into atom-sized pieces and rebuilt from the ground up.

Ergo Trump.

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Guillotine

Artist’s conception of a traditional annual performance review at a French investment bank

Even Willie Mays missed a fly ball every once in a while.

Reuters reports that investment banking firm Lazard Ltd, which advised SolarCity on its $2.6 billion sale to Tesla Motors Inc, made an error in its calculations that discounted the value of Solar City by $400 million.

But the headline is worse than the actual story, so one might question whether there’s some “clickbait” sensationalism involved. There was a miscalculation according to a regulatory filing made by Solar City, but the miscalculation related to a range of minimum-maximum share prices, rather than to a definite acquisition price.

Using its discounted cash flow model, Lazard came up with an equity value range of between $14.75 and $34.00 per share for Solar City. After closing, Lazard realized that it had double-counted some of Solar City’s projected debt. After corrections to the DCF calculations, the valuation range was adjusted to $18.75 to $37.75 per share.

The $400 million figure sounds bad, and of course it is. But the purchase price the parties ultimately agreed to, which was paid in Tesla stock, came out to $25.37 per share. So regardless of the error, the price paid was still within the range originally provided by Lazard.

I’m sure there are lawyers out there who would, if asked, take the case and file against Lazard, but I would not count myself among them. Lazard and Tesla will probably dust themselves off and move on. No harm, no foul.

What’s really interesting about this case is not that an error was made, but rather how Lazard might handle its repercussions internally. Who made the error? Who checked the figures? While I wouldn’t take the suit, I would certainly place money on heads rolling across the office floors at Lazard’s headquarters.

[Attention carpet cleaning companies: send your brochures to Lazard now.]

Lazard, originally a French merchant company that grew into a major investment banking house in the New World via New Orleans, might just keep an old Rasoir National (see artist’s conception, above) in storage somewhere in a New Jersey warehouse for just this type of occasion.

When the Great Recession occurred, the Wall Street chorus was that it was nobody’s fault, they never saw it coming, and nobody could have seen it coming.

Right.

The rapidity with which Wall Street bankers transitioned from omniscient Masters of the Universe to a collection of Sargent Schultz clones was the closest mankind has yet come to attaining the speed of light. Despite precipitating the worst financial crisis since the Great Depression and imposing on the U.S. taxpayer bailout costs rivaling those of a world war, no one was held accountable. Wall Street was grateful for Bernie Madoff because his Ponzi scheme story was simpler and took the spotlight off them.

But if you are the unfortunate person at Lazard on the Solar City-Tesla deal who’s tagged with responsibility for this DCF error, whether you’re a first-year analyst or a managing director, you can expect a career ending scene such as that depicted above.

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Soft-diamond Specials waiting to move out

Soft-diamond Specials waiting to move out.

Argument is scheduled for today in bankruptcy court in St. Louis over Peabody Energy’s request for approval of $16,200,000 in executive bonuses for six top executives (In re Peabody Energy Corp., Bankrtcy., E. Dist. Mo.). Peabody, one of a series of coal company insolvencies over the past few years, filed bankruptcy this past April, attributing its difficulties to declining demand overseas, particularly from China, low market prices for coal, and the loss of electricity generation demand to cheaper shale gas. These factors allegedly rendered the company unable to service its $10.1 billion debt load.

The United Mine Workers pension and benefit funds oppose the plan, saying it’s both inappropriate and unfair to pay bonuses to senior executives when employees are losing their jobs.

Peabody Energy counters that the bonuses are essential to turn the world’s largest private-sector coal company around and offer stakeholders the best possible recovery. The company claims that the bonuses are tied to its achievement of certain performance benchmarks through the end of 2017. Reuters reports that the debtor’s unsecured creditors’ committee supports the bonus plan and that the U.S. trustee has not objected.

Though unseen, the ghosts of AIG retention-bonuses-past usually attend these hearings. A debtor proposing such a plan must show that it is based on pay-for-performance and not just an executive retention program.

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Archduke Franz Andrew Sullivan, a leading Perhapsburg

Archduke Franz Andrew Sullivan, a leading Perhapsburg

Because new things are happening in the world, and in the U.S. in particular, we need to find new ways to express ourselves so that we can make our thoughts clear to others. Accordingly, The Sparkspread brings you the first in a series of useful neologisms:

Perhapsburgs

(Noun; pronounced purr-haps-bergz).

This word derives from the English adverb perhaps and the proper name of the Habsburgs (in German, “b” is usually pronounced like “p” in English), the aristocratic family that ruled the Holy Roman Empire for about 400 years, and then the Austro-Hungarian Empire until its dissolution in the aftermath of World War I.

Perhapsburgs, in a word, think they might be kings, or at least aristocrats, and should be treated as such by the commoners.

Perhapsburgs can best be used as a descriptive noun for a clueless and out-of-touch financial, political and media elite. They remain in office or in their jobs, even as their entire world spins out of control, often, if not always, due to their mistakes. Political affiliation is not determinative of one’s character as a Perhapsburg. They can be Republicans, Democrats or Independents. A Perhapsburg knows what’s in the best interest of the common people better than the common people do. Democracy is flawed, in their view. That’s why the Rise of Trump and the Brexit have completely removed the floors from beneath their feet. We could call them “the elites,” but that’s a rather old and plain term and just doesn’t have as much oomph. Their sense of entitlement is vastly out of proportion to anything that their accomplishments can justify. Indeed, a peculiar characteristic of Perhapsburgs is that they fail upwards: often, the more massive their mistakes (e.g., Iraq War, Bank Bailout, AIG Bonuses, etc.), the more they tend to rise in the pompous hierarchy they have created for themselves.

In the United States today, the largest Perhapsburg habitat is the “Acela Corridor,” also known as the Wall Street-Washington Axis. Other cities have them as well, so don’t be surprised to find Perhapsburgs living in your town.

They know more about the Renminbi Index than they do about why many Americans have been unemployed for a year or more, or why all those stores on Main Street are covered with plywood sheets. And they don’t really care. The Perhapsburgs form an uppercrust in which everybody knows everybody else, and business and policy decisions are traded, one for the other, with only the interests of the Perhapsburgs considered. Thus, when a Perhapsburg proclaims: “This new international trade deal will be good for everybody,” the term “everybody” includes only other Perhapsburgs. The Washington Perhapsburgs exploit their political power to make themselves fabulously rich, while the Wall Street Perhapsburgs exploit their fabulous wealth (via campaign contributions, special interest PACs, etc.) to make themselves politically invincible. See? Good for everybody!

The Perhapsburgs have seen Trump, and they’ve seen Brexit, and they do not like what they see. They are threatened down to the soles of their Gucci loafers. The Perhapsburgs are very much like the German Herrenklub of aristocrats, Prussian junkers, wealthy industrialists and bankers who eventually shuffled Adolf Hitler into the Chancellorship, even though Hitler lost the 1932 election (he received about 30% of the vote, compared to Hindenburg’s 49%). Like the Perhapsburgs, the Herrenklub cast aside the results of a democratic election because they believed they could control that mustachioed little ex-corporal.

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Richard II, King of England

Richard II, King of England

Ah yes, back to those elites. They cannot stop calling the Brexit vote stupid. The contempt of the elites, both U.S. and English, for the voters of England knows no bounds. Like Andrew Sullivan on this side of The Pond, they think that England, like America with Trump, is suffering from too much democracy. Sullivan, and those of the punditocracy who condemn the Brexit vote and the Rise of the Trump Reich (as bad as that is) have it exactly backwards. Brexit and Trump are similar not because they reflect too much democracy, but because they reflect too little democracy.

In the EU, and at its center in Brussels, the heart of the issue is that there is a complete lack of democratic control. Edicts flow from a faceless, nameless bureaucracy in Brussels, and regardless of how well-intentioned any of its officials may be the fact remains that the ordinary people of England no longer have any voice in controlling their own lives. Here in America, we know the feeling when we have to press 1 for English, 2 for Spanish, 3 if we’d like to pay our bill, and so on. There’s never an option for the problem you’re calling about.

If you’re an Englishman (or -woman) trading equities or bonds in the City of London and making GBP750,000 gross per year, you may find many features of the EU annoying, but all-in-all it’s manageable and you’re making a good living, so your take is to keep calm and carry on.

But if you’re running a bed-and-breakfast in the Cotswolds and have to make sure that your guests’ sheets have a certain number of threads per square inch, well, your perspective is likely to be rather different.

The liberals and the Left in the U.S. (of which I consider myself a member) and Europe do themselves no favors by trying to characterize the Brexit and the Rise of the Trump Reich as some sort of contemporary Peasant Revolt. The more they do this, the more they fail to acknowledge the very legitimate concerns of the people over their disempowerment, and the more they encourage the very type of populism they profess to condemn. By persisting in this fundamental disrespect of the people and their votes, the elites confirm not only that they live in a bubble, but that that bubble is impenetrable.

Take the headline from today’s Huff Post: “Hate Crimes Skyrocket in UK”, posted above above a picture of some graffiti to the effect of “F#@k off Polish Scum.” Sorry Arianna, you’re way off the mark on this. Are there those among the Brexit voters who are xenophobic and racist, or worse? Sure. Likewise, there are some number of Trump supporters who would readily identify with these types. But does that mean that all of them are racist, or that the popular vote in favor of leaving the EU is some sort of collective racist or xenophobic act? Not at all. Arianna has committed the same sin for which she (and many others on the Left) correctly condemn Trump and others on the Right: she has characterized an entire group (Brexit “Leave” voters) as racists based on the graffiti painted on some wall by one or more of them. Yes, the graffiti is awful. But conceptually Huffington’s reaction to it is identical to Trump’s alleging that all Muslims know about terror plots of their co-religionists simply because they are co-religionists. Whether coming from Trump or Huffington, this type of idiocy rightfully deserves our rejection.

Peasant Revolt? Not really, but there are, nonetheless, a few parallels with 1381 worth noting.

Just as the U.S. (and to a lesser extent Britain) have waged a decade-plus long war in Iraq and Afghanistan at a cost of thousands of U.S. and British lives (not to mention the locals) and trillions of dollars flushed into the latrine, Richard II through his uncle, John of Gaunt, led an equally catastrophic and prodigiously wasteful campaign in France to reassert Plantagenet control over Bordeaux and the Aquitaine. The peasants, naturally, had to pay for that disaster, just as we modern taxpayers have had to pay for our elites’ fiascos in Iraq and Afghanistan and the bailout of the banksters and their equally catastrophic gambling debts (a/k/a collateralized debt obligations, etc.).

Among other things, the peasants back in 1381 were very unhappy with villeinage, their status as serfs tied to the land and owned (that’s right, owned) by their landlords. Here in the modern U.S. (and likely in Britain, as well), our answer to villeinage is the mountain of debt, whether mortgage, educational, credit card, medical or other, that enables us peasants to fulfill our roles in the modern consumer economy. Feudalism 2.0.

Like the noblemen who accompanied Richard II to Mile End and Smithfield, our modern elites now stand aghast at the brazen insolence of the peasants, voting against what they’ve been told is in their best interest. Back in 1381, Wat Tyler, one of the leaders of the Peasant Revolt, raised the tensions quite a bit when he and his rebels met with Richard II.

Like some medieval Rodney Dangerfield, Richard II did not get any respect.

When he came face to face with the King, Wat Tyler did not take off his hat. Then, instead of waiting for the King to extend a hand to him first, Wat took the King’s hand and shook it roughly, just as one peasant farmer might greet another. Then Wat upped the ante. The King demanded that Tyler dismiss his men. Tyler not only refused, but said he’d be back to London in two weeks with forty thousand more men. Then he took a swig of ale (from a flagon with a dragon, not the chalice from the palace or the vessel with the pestle) and started tossing his dagger from hand to hand in front of Richard.

All this was just a tad over the top for Richard II’s knights, one of whom galloped at Wat and ran him through with a sword. End of Wat.

In response, the yeomen that Tyler had brought with him nocked their arrows and drew their bows. Richard II and his knights saw that they were about to become a human version of swiss cheese courtesy of the English longbow. But like most of his Plantagenet forbears, Richard was nothing if not a quick thinker. He defused the situation by saying that he would lead the peasants and abolish villeinage. Hmmmm. (He went back on his word a few months later.)

Maybe the contemporary peasants are in revolt. One thing’s for sure, our present-day elites find them revolting.

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Elizabeth II

The Real QE2

By a margin of around 2 million votes the people of Britain gave a giant collective middle finger to the so-called elites of both their island and the EU. Recall that those elites have been warning for months that there would be a skyfall (and not the James Bond movie type) if Leave won and Remain lost.

The clueless American commentariat have trotted out their usual question when anything supposedly bad happens overseas: could it happen HERE? Since we’re not members of the EU, the media portray the Trump phenomenon as a yardstick to measure whether the popular will in England reflects the same type of popular will in the U.S.

The basic parallel between the Brexit vote and the Trump phenomenon is a rejection of the elitist, or corporatist, form of government that has been in effect in the United States as well as in Europe for more than a generation now.

The NRA is a perfect example of our corporatist form of government. The NRA funnels boatloads of money to U.S. senators and representatives, who then do the NRA’s bidding to ensure that people on the no-fly list can still buy assault rifles. Only in the past few days, with a sit-in by Democrats on the floor of the House, have the timbers of the gun lobby begun to shake a little bit.

While the NRA draws more press, Goldman Sachs is far more important. Goldman is not simply an example of the Wall Street-Washington Axis of elites, it is the Motherlode of corporatism/elitism. It’s the most important primary dealer in U.S. Treasury securities (i.e., buying direct from the government and then reselling). With alumni like Hank Paulson serving as Treasury Secretary and many others in prominent and important offices in the financial and regulatory side of the Washington, Goldman Sachs doesn’t just influence the U.S. Government’s financial policies; it is embedded in them. They flow from Goldman, whose word is swallowed whole by Treasury apparatchiks like Tim Geithner. In times of crisis, like the Great Financial Meltdown and Recession of 2008-09, a small group of Goldman executives, alums and acolytes exerted a decisive influence in deciding what steps the United States Government should, and would take in response to the financial crisis. No one dared dissent from the self-interested Goldman Sachs directives, and one way or another Goldman made a lot of money out of the crisis.

Elizabeth II

The Real QE2

Funny how that works. In Britain, they’ve said “enough.” And here?

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Exelon CEO Chris Crane

Exelon CEO Chris Crane

A week or so ago, the Illinois General Assembly failed to pass Senate Bill 1585, the Exelon Bailout Bill. The bill failed despite a series of full-page newspaper ads and a robocall campaign touting how great the Exelon bailout would be for consumers. Exelon CEO Chris Crane even went so far as to set a deadline for the Illinois Legislature: Unless you pass the bailout bill by May 31, we’ll close two nuclear generating stations (Clinton and  Quad Cities).

Mr. Crane apparently remains unaware how much his threat to kill off two of his own nuclear plants resembles the threat made by Cleavon Little, playing the unforgettable role of new Sheriff Bart in Mel Brooks’s Blazing Saddles (1974).  Just after new Sheriff Bart arrives, the townspeople (nearly all of whom are surnamed Johnson) threaten to shoot him because he’s not quite who they expected. Bart then draws his pistol, holds the muzzle to his own head and threatens to shoot the sheriff (i.e., himself) if the townspeople don’t back off:

Sheriff Bart (as gunman): Hold it! The next man makes a move, the #$%^& gets it!

Olson Johnson: Hold it, men. He’s not bluffing.

Howard Johnson: Listen to him, men. He’s just crazy enough to do it.

Sheriff Bart (as gunman): Drop it! Or I swear I’ll blow this #$%^&’s head all over this town!

Sheriff Bart (as hostage): Oh, Lordy, Lord, he’s desperate! Do what he say! Do what he say!

[SHERIFF BART, STILL HOLDING THE GUN TO HIS OWN HEAD, DESCENDS FROM THE PLATFORM AND MOVES TOWARD THE SHERIFF’S OFFICE]

Harriet Johnson: Isn’t anybody going to help that poor man?

Howard Johnson: Hush, Harriet. That’s a sure way to get him killed.

Sheriff Bart (as hostage): Help me, help me……somebody help me!

Sheriff Bart (as gunman): Shut up!

Just as Sheriff Bart managed to escape unscathed, so we learned the next day that Exelon and the legislature are working on a “new compromise” that would prop up Exelon’s two troubled nuclear plants. Expect to see Mr. Crane reprise his role as Sheriff Bart, with a renewed threat to euthanize the Clinton and Quad Cities stations, in the weeks leading up to the next legislative session.

In earlier posts, The Sparkspread explained how, more than a decade ago, the top management of Exelon embarked on a grand plan: strip the generating assets (i.e., nukes) out of the stodgy, old, regulated utility and transfer them to a shiny, new generation subsidiary called Exelon Generation. After all, it wasn’t as if the regulated utility was going to open up new markets. Its service territory was fixed. It was much better to have the generation assets in an entity that wasn’t regulated, that could make profits in a competitive wholesale market, and keep those profits without a regulatory say-so.

Once Exelon had the nukes in a separate subsidiary, it stood to earn some hefty profits because its generation costs were very stable. Sure, it had to refuel periodically, and operations and maintenance are not cheap, but on a relative basis the cost of nuclear generation was very low relative to natural gas-fired generation, and the latter sets the electricity price at the margin in this market. All of this was planned before the advent of fracking, when the price projections for natural gas all looked like hockey sticks. Well-informed market players feared that the U.S. wouldn’t have enough natural gas, and they predicted that we’d have to import it. So Exelon placed its bets. One could almost see Adam Smith smiling down from above. What could go wrong?

A couple of things, it turns out. First, the fracking revolution in natural gas turned lots of assumptions about the U.S. energy picture upside down. The U.S. with a natural gas shortage? Not now. We’ve got more than a century’s worth of supply at current consumption rates, enough to export it with the right facilities and markets. Between 2005 and 2012, natural gas production increased almost 30%, a rate of increase that triggers comparisons with the Golden Age of American Industrialization between the end of the Civil War and the turn of the 20th century. Heady stuff, but the cloud in this silver lining is that decreasing natural gas prices translate to decreasing wholesale electricity market prices.

Then the Great Recession Double Whammy hit, and the economy tanked. Production, and therefore energy demand, went down. Nowadays the Federal Reserve issues its monthly Panglossian pronouncements that the recession is over, unemployment is down, and everything is fine. The 2016 presidential primary season showed that neither the Fed nor anyone else in D.C. has a clue about anything outside the Beltway. The American voter has seen enough bogus economic data swallowed without question and regurgitated by bogus financial news media. The continuation of low market electricity prices says it all.

Make no mistake, Exelon’s fighting a war on two fronts: low energy market prices in the east and sluggish economic recovery in the west. But Exelon, its management, and its shareholders assumed that risk. They wanted to be entrepreneurs, and the Illinois General Assembly granted their wish with the necessary amendments to the Illinois Public Utilities Act.

Exelon played the market, and it lost. In Donald-Trumpese, Exelon is a “LOOZER,” just like all those poor slobs who keep demanding an increase in the minimum wage. (The nerve!!!)

When the energy market was high and Exelon Generation was making money, Crane was pleased to talk about the glories of the free market, private enterprise, shareholder value and the privatization of profits. But now that the market has turned against Crane all that shareholder value malarkey has to be swept under the rug like something unmentionable that you don’t want your dinner guests to see.

To everything there’s a season, and the time for privatizing profits is over. Now is the time for socializing losses. Crane has to talk about how “the market is flawed,” how the Exelon Generation nuclear fleet is imbued with a vast public interest, and how the citizens of Illinois are no longer just chumbolones (to borrow a John Kass-ism). Now, they’ve been elevated to the rank of “stakeholders.” Funny how that works. Crane’s worshipful attitude towards ratepayers increases in direct proportion to the magnitude of the public subsidy he’s looking for. To bail out Exelon, the Illinois General Assembly needs to hit ratepayers with a new charge called a zero emission credit. He didn’t get it this time around.

The Exelon Bailout Bill perfectly exemplifies the type of crony capitalism (or, more appropriately, Craney Capitalism) in which Exelon’s sycophants in the General Assembly are only too happy to use the state’s power to subsidize Exelon and protect its privatized profit model from the perils of a free market whose virtues it extolled when the market was high.

No wonder Trump’s popular.

 

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