Archive for the ‘IEF’ Category

Draghi Drags S&P 500 Over 2000; Potential ECB Easing Boosts Dollar

Monday, September 1st, 2014

NEW YORK (TheStreet) -- On this Labor Day, European Central Bank President Mario Draghi is doing the heavy lifting for the S&P 500a . The ECB, not the Federal Reserve, is currently the central bank pushing investors into riskier bets in the U.S. stock and U.S. bond markets. The ECB currency countries constitute the largest economy in the world. A substantial bond buying program from the ECB will boost the dollar further along with the prices of all U.S. assets, including U.S. stocks. The Federal Reserve's third bond buying program or quantitative easing (QE3) has been much maligned for driving investors into riskier sectors such as the stock market, SPY, , a and . Yet, with the QE3 tapered out, guesses for the start of Fed funds interest rate hikes center around mid-2015. That means the Fed is starting to put the brakes on speculation. U.S. data on unemployment, corporate earnings and growth show a recovery in the U.S. in full swing, and stock prices are reflecting that. Thus, the Fed will be forced to raise rates sooner rather than later, which should be pushing up U.S. Treasury yields. But Treasury yields fellain August and Treasury bonds, or , have been rallying. At the end of August, it was the potential of more monetary stimulusa from the ECB that was driving U.S. bond prices higher. Read More: 10 Stocks George Soros Is Buying in 2014 Europe is still mired in a debt-deflationary spiral. Unemployment rates top out above 20% in many member states in the eurozone, and the overleveraged banks refuse to lend.aDraghi hinted at more stimulus at the central banker's conference at Jackson Hole, Wyoming, recently. Draghi has talked tough before and failed to act. Nevertheless, it finally seems as though the ECB has no choice but to flood the world with euros to prevent deflation. The last time the S&P 500 first crossed a thousand-point threshold was in 1998 during the Asian crises. In that year, the dollar rallied because of devaluations and weakness in Asia. Investors fled to U.S. markets for safety in 1998. Today, European investors are moving to the U.S. for better yields and have helped boost the S&P 500 index past the 2000-point mark in August. In 1998 as today, the Fed faced little inflationary pressure to raise rates at a faster clip, due in part to the dollar rally. Read More: Will European Central Bank Ease Policy in Wake of Weak GDP? German bonds are the only large safe haven in the euro currency zone. In the last week of August, German 10-year government bonds (bunds) yielded a measly 0.9%awhile investors could get more than 2.3%ayield on the U.S. ten year Treasury. The low bund yields likely reflect both deflationary expectations in Europe and the anticipation of an ECB bond buying program. Either scenario justifies minuscule German bund yields. These low bund yields are spurring the flow of cash out of Europe. That flow makes the dollar more valuable and also moderates U.S. import price inflation. Both the reduced import price inflation pressure and increase in demand for Treasuries pushes down yields and boosts prices of U.S. government bonds. Thus, it seems for now, the U.S. Treasury market can defy the logic that interest rates have nowhere to go but up. At the time of publication, the author was long SPY and VOO.

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Want Yield? Stay Away From Treasury Inflation-Protected Securities

Thursday, May 29th, 2014

NEW YORK (Fabian Capital Management) -- Treasury Inflation-Protected Securities, or TIPS, are an interesting subset of Treasury bonds designed to protect your purchasing power from the effects of rising consumer prices. However, many investors have fallen prey to the misconception that rising TIPS prices means an inflationary environment. TIPS are issued by the U.S. Treasury with a fixed coupon and face amount that fluctuates in accordance with changes in the rate of inflation. The most common and widely accepted inflation indicator is the Consumer Price Index. When the Consumer Price Index is rising, the Treasury pays interest on the adjusted higher face value of the bond which creates a gradually rising stream of interest payments. This increase in coupon payments allows you to protect your purchasing power by receiving additional income when the price of goods and services is increasing. The largest exchange-traded fund in this space is the iShares TIPS Bond ETF , which has nearly $13 billion invested in 39 Treasury inflation-protected securities. Most TIPS are issued with long maturity dates and, therefore, the exchange-traded fund TIP has an effective duration of 7.6 years. This makes its price more sensitive to changes in interest rates than a shorter-maturity Treasury fund. In addition, because TIPS are not issued as often as typical Treasury bonds, the income from TIPS tends to be lumpy. This results in dividend income that rises and falls dramatically from month to month and can produce misleading dividend yield statistics. Right now the trailing 12-month yield on TIPS is listed at a meager 0.98%. This is calculated by summing the prior 12 months of distributions and dividing by the current share price. The price of TIPS responds to changes in intermediate-term interest rates similar to the iShares 7-10 Year Treasury ETF rather than inflationary pressures. The recent collapse in the CBOE 10-Year Treasury Yield has spurred investors to come pouring back into bonds and prompted TIPS to hit new 2014 highs. So far this year, TIPS have gained 5.71% amid frenzied demand for fixed-income assets. If the 2013 interest rate backup taught us anything, it's that a TIPS is not an effective tool at fighting rising Treasury bond yields in an environment of low inflation. Instead, it can be used as a directional bet on falling interest rates or as a potential income accelerator when the Consumer Price Index is trending higher. With relatively tepid CPI statistics over the last decade, TIPS has yet to show its true colors during a period of deteriorating purchasing power. Source: Bureau of Labor Statistics, Consumer Price Indexes We would not likely see a dramatic increase in the yield of TIPS without inflation breaking out above this long-term sideways trend. While there is some evidence that we are witnessing rising food and energy costs this year, the CPI has yet to reflect a confirmation that inflation is running above average. ETF income investors should be wary that in a low-inflation environment you give up substantial yield by investing in TIPS above a comparable Treasury or investment grade bond fund. This is because the "inflation insurance" component acts as a drag on the distribution yield of the fund. At the moment I do not have any exposure to TIPS for my income clients because I don't believe the current environment is supportive of an inflationary hedge. I would rather be positioned in fixed-income sectors that are continuing to provide a higher yield with an eye towards managing interest rate risk. The Pimco Income Fund and DoubleLine Total Return Fund are two actively managed funds that have been core holdings of mine for some time. In addition, I have a tactical position in the iShares J.P. Morgan USD Emerging Markets Bond ETF as a diversified value play outside the U.S. I plan on expanding or collapsing my fixed-income sleeve in response to changes in interest rates or credit spreads as a function of risk management. I also plan on keeping a close eye on inflationary statistics in the event that a fund like a TIPS warrants a closer look down the road. At the time of publication the author had a position in EMB. Follow @fabiancapital // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); // ]]> This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. >>Read more: The Seven Deadly Sins of Biotech Investing

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Reduce Your ETF Risk, not Well-Deserved Rewards

Friday, May 16th, 2014

NEW YORK (ETF Expert) -- Jonathan Krinsky, chief market technician at MKM Partners, is the latest commentator to add perspective on the trouble with U.S. small-cap stocks. He noted that roughly 80% of large-cap S&P 500 components are currently trading above their long-term trendlines (200-day), while only 40% of small-cap Russell 2000 components are above their 200-day moving averages. According to Krinsky, it marks the widest divergence between the two benchmarks since 1995. A variety of market watchers have been pointing to the poor prospects of an asset class with an aggregate price-to-earnings ratio of 100. On the other hand, investors have been paying a substantial premium to own smaller company growth for several years, irrespective of the price-to-earnings or price-to-sales data. Might the selling pressure be attributable to something other than overvaluation? Perhaps. Consider a number of recent concerns about the U.S. economy. "Core" retail sales fell 0.2% in April, suggesting that the treacherous winter cannot be blamed for why consumers held onto their wallets in the springtime. In the same vein, the Commerce Department originally estimated the U.S. economy expanded ever-so-slightly in the first quarter of 2014 (0.1%). Yet, estimates are being revised dramatically lower to reflect an economy that may have contracted for the first time in three years (0.6%-0.8%). While some investors may choose to look beyond "old information," other investors may be turning squeamish on the notion of holding onto growth at any price. The shift away from smaller company ownership can be seen in the iShares Russell 2000 : S&P 500 SPDR Trust price ratio. Relative weakness in IWM is evident in the price of IWM:SPY falling below and staying below a long-term 200-day trendline. Equally compelling? The 50-day moving average crossed below the 200-day moving average in late April, suggesting that small-caps may remain out of favor for the foreseeable future. Equally fascinating, interest rates have moved lower in 2014. The overwhelming majority of commentators and economists projected rates would be higher by year-end. (Note: I offered my dissenting opinion in an Against the Herd feature this past January.) Confounded experts are blaming the Russia-Ukraine conflict. Others believe that weak economic growth is a function of unusual weather patterns, and that safety-seekers will abandon the bond market soon enough. Still others attribute bond gains (lower interest rates) to demand by pensions and large institutions, as many may have a greater need to protect principal than swing for the stock fences. That's not at all. There's the U.S. Federal Reserve's explicit promise to keep rates low, long after tapering of quantitative easing ends. There's even a case to be made that high frequency trading operates largely on technical chart patterns that have been favorable to bond ETF ownership. The iShares 7-10 Year Treasury Bond Fund is hitting year-to-date highs while the 10-year Treasury yield is at year-to-date lows (2.53%). From my vantage point, you're hearing a whole lot of after-the-fact excuses why interest rates are going down. An explanation that served as the origin of my original thesis on lower interest rates involved the uncertainty that comes with the central bank of the United States exiting from quantitative easing (QE). For five-and-a-half years, the Fed's "on-again-off-again" unconventional stimulus has bellowed a familiar pattern. Specifically, assets from stocks to real estate surged higher in the early-to-mid stages of stimulus; assets from stocks to real estate faded in the later stages of stimulus and/or perceived stimulus removal. If early birds are scaling back their risk profiles -- taking profits on "Nasdaquie" equities, exiting smaller-cap securities, snatching up U.S. investment grade bonds -- should you follow suit? For the most part, yes. Consider shifting a portion of your allocation to more favorable trends. For instance, you can reduce small-cap U.S. exposure, while increasing low price volatility exposure in iShares USA Minimum Volatility and/or PowerShares MidCap Low Volatility . Additionally, Europe is gearing up for more stimulus from its central bank and European equities are cheaper on a price-to-earnings (P/E) basis. That should provide a bit of a cushion in selecting assets like iShares MSCI EAFE Value or WisdomTree Hedged European Equity . For those who, like myself, expect the euro-dollar to decline, HEDJ hedges against the currency risk. Follow @etfexpert // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); // ]]> This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. >>Read more: Buffett's Berkshire Builds Verizon Stake, No IBM Buying Spree

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Small-Cap ETFs Signal Big Warning Signs Now

Friday, May 9th, 2014

NEW YORK (Fabian Capital Management) -- The direction of stocks has been decidedly mixed over the last several months. Large-cap indexes such as the SPDR S&P 500 ETF and Dow Jones Industrial Average ETF have been mostly trading sideways with some slight upward directional bias. The tug of war involving earnings, economic data and interest rates has helped to put a modest floor under larger, cash-rich companies. However, the same can't be said for small-cap stocks, which have been under more selling pressure recently. The iShares Russell 2000 ETF broke below its 200-day average this week for the first time since November 2012, signaling a pause (and perhaps change) in trend for these growth-sensitive stocks. On the surface, this may seem like a somewhat benign decline of 9% from the 2014 highs in IWM. However, there is some legitimate concern mounting that small-cap stocks may become be a leading indicator of weakness that will spill over into the rest of the market. It would not be surprising to see this index lead a correction lower after being one of the strongest segments during this bull market. Over the past two years, nearly every modest pullback in growth-oriented sectors has been bought with gusto. This has led to the price of small-cap stocks severely outpacing earnings growth and pushing valuations to extreme levels. The concern more recently has been the inability of IWM to mount any convincing push higher when nearly every intraday rally is met with heavy selling pressure. In addition, we have seen dollars shifting from more aggressive areas like biotechnology, solar, and social media stocks to defensive names in utilities, consumer staples, and energy. All of these signs point to an unwinding of risk and shift to value or dividend opportunities as a function of inter-market dynamics. These same forces have been a tailwind for fixed-income as well. Portfolio managers have been aggressively repositioning their asset allocation to account for a scenario where we see additional volatility in stocks and flight to safety in bonds. ETFs such as the iShares Investment Grade Corporate Bond Fund and iShares 7-10 Year Treasury ETF have been trading sharply higher and gaining assets as a function of risk management. From a seasonal standpoint, we're now exiting the strong growth months and entering a historically lackluster period. That means you should be extra vigilant about positioning your portfolio in the areas that represent the strongest chances for success. I don't believe it's time to clear the decks and run to cash, but you should be carefully monitoring your holdings and assessing your risk relative to other opportunities. One of the best strategies this year has been to simply be cautious with a healthy dose of low-volatility large-cap stocks, fixed-income, and even cash on hand to take advantage of new opportunities. Two long-term core equity holdings in my clients' portfolios right now are the iShares MSCI U.S. Minimum Volatility ETF and First Trust Nasdaq Technology Dividend ETF , which have both exhibited positive momentum year-to-date. Both exchange-traded funds focus on selecting stocks with dividend or value characteristics that make them attractive in this type of market. I believe this theme will continue for the near future, and as such, you should be flexible with your asset allocation to control risks. Patience and discipline will be rewarded with additional tactical themes as a result of shifting trends that you can use to your advantage. Even volatile areas like small caps will once again present an attractive opportunity to capitalize on under the right circumstances. At the time of publication the author had a position in USMV and TDIV. Follow @fabiancapital // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); // ]]> This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. >>Read more: Tesla Takes on Missouri >>Read more: Puma Wins Big at NFL Draft With Jadeveon Clowney

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Against the Herd: Lower, Not Higher, Rates in 2014

Saturday, January 18th, 2014

NEW YORK (ETF Expert) -- Bloomberg News surveyed banks and securities companies on where the 10-year Treasury yield would finish 2014. Economist forecasts averaged 3.41%. With 2013 closing near 3.01%, perceived strength in the underlying U.S. economy, and the Federal Reserve reining in its controversial bond buying program ("QE3″), the predictions are hardly outlandish. On the other hand, where in the media will you find bond bulls who believe that interest rates will go significantly lower? Does anyone think that rates could tumble back towards 2%, or even 1.5%, sending bond prices surging back to record highs? It is worth noting that gains for Treasuries in the first few weeks of January are the strongest that they've been in four years. In fact, income exchage-traded funds of all flavors are seeing capital appreciation and seven of 10 have climbed back above respective long-term (200-day) trendlines; only the three Treasury bond ETFs remain below respective moving averages. Could Income ETFs Be Signaling Lower Rates Ahead?                               Approx YTD %   Above 200-Day                 Vanguard Extended Duration (EDV)   4.7%   -3.4% iShares 20+ Treasury (TLT)     3.0%   -2.4% PowerShares Preferred (PFF)     2.9%   1.3% Market Vectors High Yield Muni (HYD)   2.6%   -0.9% SPDR Barclay Muni (TFI)     1.8%   1.5% PowerShares Emerging Market Sovereign (PCY) 1.5%   0.0% iShares 7-10 Year Treasury (IEF)   1.5%   -1.3% SPDR Barclay High Yield Bond (JNK)   0.7%   3.6% PIMCO 0-5 Year High Yield Corp (HYS)   0.4%   3.4% PowerShares Senior Bank Loan (BKLN)   0.4%   1.8%                 S&P 500 SPDR Trust (SPY)     -0.3%   9.6%                 Perhaps ironically, the gains for income ETFs in the first part of 2010 is eerily reminiscent of the way that the bond markets anticipated the end of the first round of quantitative easing ("QE1″) six months in advance. At the start of 2010, it was well known that QE1 would be coming to a close in June. Yet, a "soft patch" in the economy sent stocks reeling for a 15%+ correction in the summertime. Then the U.S. stock market welcomed July's announcement of a second round of quantitative easing to commence in August ("QE2″). The news fueled stock gains throughout the second half of that year. I am not "predicting" a first-half correction for stock assets in 2014. Nevertheless, if earnings guidance turns out to be weak, or if income ETFs continue to march higher on price gains, or if incoming jobs data are poor for several months, do not be shocked by any hesitation on the part of investors to purchase riskier assets on the dips. Instead, lower stock prices combined with higher bond prices (lower bond yields) might force Chairwoman Janet Yellen to suspend a tapering increment; if a stock correction is severe enough, Yellen's colleagues may vote to increase its monthly bond purchasing activity. Since I did begin this discussion with the average forecast for the 10-year yield at the close of 2014 (i.e., 3.41%), I will venture an educated guess on where it will finish. I expect a slight flattening of the yield curve to keep longer-dated Treasuries (e.g., 10-year, 30-year, etc.) in check, regardless of month-to-month volatility in lengthy maturities. Couple a modest flattening of the yield curve with a historically probable shock to the "risk on" mentality, and I am offering 2.75% for the end of the year. In essence, I expect it to finish rather close to where it is right this minute. Follow @etfexpert // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); // ]]> This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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When to Taper Your Exposure To U.S. Stock ETFs

Saturday, December 14th, 2013

NEW YORK (ETF Expert) -- Long-time readers and clients already know how I feel about the current U.S. stock market bull. For example, the absence of revenue growth at corporations (e.g., average sales growth for Dow components in 2013 is -0.7%) and the exceptionally high cyclically-adjusted P/E (i.e., 25) do not matter right now. And that's okay. Pending home sales have dropped for five straight months and mortgage applications have declined for five consecutive weeks, placing a potential damper on the real estate recovery. That's okay, too. Not to be outdone, bearish sentiment by investment advisers, a well-tracked contrarian indicator, has plunged to its lowest level in a quarter century (14.3%). That's fine as well. In other words, as long as the investment community believes Federal Reserve maneuvers will benefit equity risk-taking, it is sensible to participate in the easy-to-identify uptrends. On the other hand, let me present a hypothetical scenario whereby the Dow at 16,000 rises to 20,000 over the next 12-24 months. Should the 25% price gains occur, even the most strident bulls would recognize the historical probability of a stock bear emerging after six to seven years of upward movement. It follows that those 25% gains would be wiped out in a buy-n-holders account if a 20% bear came to the picnic table. Moreover, with the average bearish erosion at 30%, a Dow Industrials stock that reaches 20,000 might see 14,000 before it sees 24,000. The point here is not to discourage advocates of exchange-traded funds from participating in the Fed-fueled rally. Rather, the point is to drill home the notion that, at this point in the cycle, you cannot afford to buy-n-hold your stock assets. Fortunately, there are a number of simple ways to determine whether it is time to lighten up. One of the most basic methods? Bolster your cash account if the price of the SPDR S&P 500 Trust breaches its 200-day on the downside and fails to bounce back quickly. You could sell a small portion, a large portion or the whole kit-n-kaboodle. Just be certain to be consistent with your personal discipline for reducing risk. Decisions based solely on trendlines are far from perfect. Nevertheless, they'd have helped you avoid the bulk of the 2000-2002 bear, the panicky portion of the 2008-2009 collapse as well as provide a measure of comfort during the extreme price swings in the 2011 eurozone crisis. Recognizing that bull markets differ, however, it is worthwhile to examine the current bull rally in the context of Federal Reserve intervention. In fact, the last two years' worth of gains are primarily attributable to the Fed's ultra-accommodative approach. That is why I look to several influential ETFs for additional clues. For instance, the Fed's orchestration of the wealth effect with the phenomenal rise in home prices now increases the importance of watching the homebuilder ETFs. The iShares DJ U.S. Home Construction is already flashing a warning sign, whereas SPDR Homebuilders has been a bit more resilient. Some emerging-market ETFs can also assist investors identify if they might need to reduce U.S stock exposure. This is because a number of emergers are particularly dependent on foreign capital to help fund their deficits. It follows that if the Fed signals an ongoing plan for reducing its money printing, as opposed to a one-time, data-dependent gesture of lowering the dollar creation from $85 billion to $75 billion, I would expect WisdomTree India Earnings to fall back below its 200-day trendline. Right now, though, EPI's momentum is a sign that cheap money may be around for quite some time. Last, but hardly least, keep an eye on the iShares 7-10 Year Treasury Bond Fund . A price movement below the September lows would likely correspond with a 10-year yield closing well above the 3% mark. The U.S. stock market is currently pricing in a 10-year between 2.5% and 3.0%, and not much more. Follow @etfexpert // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); // ]]> This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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Don’t Wait to Bail on Bonds

Friday, October 4th, 2013

Four Trends to Watch in the Fourth Quarter

Wednesday, October 2nd, 2013

NEW YORK (Fabian Capital Management) -- The first days of October bring with them a combination of chilly temperatures, a frozen federal government and a cooling commodity complex. On the flip side, we are seeing a renewed surge in the fixed-income sector combined with resilient momentum in stocks that is restoring confidence in the markets.

As we turn the calendar to the fourth quarter, I think it is prudent to key in on four trends that will play a pivotal role through the balance of the year. By analyzing these factors, we set the stage for making prudent and balanced portfolio decisions that will allow you to safely reach your investment goals.

1. Political Turmoil: We have seen how the media likes to play up the importance of every potential conflict in the political arena. CNBC is relentlessly counting down to the next crisis -- whether it is the budget impasse shutting down the federal government or the debt ceiling debate forcing the hand of our policy makers. Everyone loves a little drama in their lives. ...

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Four Trends to Watch in the Fourth Quarter

Wednesday, October 2nd, 2013

NEW YORK (Fabian Capital Management) -- The first days of October bring with them a combination of chilly temperatures, a frozen federal government and a cooling commodity complex. On the flip side, we are seeing a renewed surge in the fixed-income sector combined with resilient momentum in stocks that is restoring confidence in the markets.

As we turn the calendar to the fourth quarter, I think it is prudent to key in on four trends that will play a pivotal role through the balance of the year. By analyzing these factors, we set the stage for making prudent and balanced portfolio decisions that will allow you to safely reach your investment goals.

1. Political Turmoil: We have seen how the media likes to play up the importance of every potential conflict in the political arena. CNBC is relentlessly counting down to the next crisis -- whether it is the budget impasse shutting down the federal government or the debt ceiling debate forcing the hand of our policy makers. Everyone loves a little drama in their lives. ...

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ETFs for the Fed’s Effect on Housing

Sunday, September 15th, 2013

NEW YORK (ETF Expert) -- Take a quick walk with me down Flashback Lane. The year is 2004. Homes, by most measures, are no longer affordable. Yet home prices did not peak until two years later in the early months of 2006.

The stock market, a forward-looking beast, tends to recognize bad (and good) trends roughly six months in advance. Not surprisingly then, one of the premier home builders, Toll Brothers , catapulted roughly 200% from $20 per share to $60 per share between the start of the bubble in 2004 and mid-2005. Toll Brothers then spent the next six months depreciating 50% in value as it dropped back down to $30 per share. It made it to $20 and below by the end of the real-estate collapse in late 2008.

...

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