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Daily Newsletter, Monday, 04/30/2001

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The Option Investor Newsletter                   Monday 04-30-2001
Copyright 2001, All rights reserved.                        1 of 1
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        04-30-2001        High      Low     Volume Advance/Decline
DJIA    10735.00 - 75.00 10906.40 10712.20 1.23 bln   1711/1349 
NASDAQ   2116.30 + 40.70  2159.08  2097.58 2.02 bln   2443/1468
S&P 100   645.47 -  3.64   657.26   643.22   totals   4154/2817
S&P 500  1249.47 -  3.58  1269.30  1243.99           60.0%/40.0%
RUS 2000  485.33 +  1.36   490.25   484.86
DJ TRANS 2827.04 - 35.33  2864.91  2820.71
VIX        28.19 +  0.42    28.61    26.78
Put/Call Ratio      0.49
******************************************************************

Biding Time

Aside from the late-day rollover in the Dow Jones Industrial
Average (INDU), the broader market indices spent the better
part of Monday's trading basing, again.  While the consolidation
of the recent gains is constructive over the intermediate- and
long-term, it requires discipline, nimbleness and patience on
the part of traders in the short-term.

Following the better-than-expected first-quarter Gross Domestic
Product (GDP) number last Friday, two economic releases this
morning perpetuated the upside momentum of the market.  The
Chicago Purchasing Managers Index, which measures manufacturing
activity in the Chicago area, rose to 38.9 during April from
its 19-year low of 35 during the month of March.  The Chicago
number is a prelude to the National Association of Purchasing
Managers Index, which is set for release Tuesday morning at
10:00 EST.  The rebound of the Chicago number hints towards
a recovery in the manufacturing segment of the U.S. economy,
but is still well below the waterline level of 50, which means
the manufacturing sector is still in recession territory.

In addition to the manufacturing data, the Commerce
Department reported that personal income during March rose 0.5
percent, despite the increase in layoffs.  Economists had
expected personal income to rise by 0.4 percent.  The better-
than-expected income number supports the case that consumers
will continue to spend and support the U.S. economy along its
way to recovery.

Despite the relatively bullish news concerning the U.S.
economy, the financial sectors of the market sharply sold-off
in the latter-half of trading Monday, which did raise a small
red flag.  Both the Bank Sector Index (BKX.X) and the Securities
Broker/Dealer Index (XBD.X) closed at or very near their
session lows.  Leading the move lower in the bank space were
shares of Citigroup (NYSE:C), J.P. Morgan Chase (NYSE:JPM) and
Bank of America (NYSE:BAC).  In the broker space, shares of
Merrill Lynch (NYSE:MER), Morgan Stanley Dean Witter (NYSE:MWD)
and Goldman Sachs (NYSE:GS) all finished very poorly.  With
the Fed injecting liquidity into the system and drastically
cutting interest rates, it's difficult not to be bullish on
this broader group of stocks in the financial sector.

However, with the exception of Bank of America, shares of the
aforementioned financials are well off their relative highs
and Monday's close is somewhat a cause for concern.  The
explanation for Monday's slide was profit taking, as volume
was relatively light in the aforementioned issues.  And we're
testing that idea by leaving Citigroup and American Express
(NYSE:AXP) on the OptionInvestor call list this evening in
an attempt to game a snapback rally in the group as early as
Tuesday or Wednesday.  We could be wrong with our bullish
stance on the financials, so we'll want to keep a close eye
on the group in the coming sessions, particularly its
impact on the broader market.  As I've written in the past,
it's paramount for the financial sector to participate in
an advance of the broader market.  Otherwise, we may be faced
with a bull trap.

As you can see on the chart of the BKX below, it rolled over
right at the 900 level, which has been a point of resistance
twice in the recent past.  Below, the BKX has support at its
200-dma, which now sits at 865; thereafter, 850 marks the
proverbial line in the sand.  If the BKX does, in fact,
breakdown below 850, my feeling is that the broader market
will pullback further to retrace its recent gains.  But, as
long as 850 holds, the broader market should trade relatively
stable.



If it weren't for the slippage in the financials Monday
afternoon, we may have witnessed the Nasdaq Composite (COMPX)
test its relative high near the 2200 level, which was traced
following the Fed's surprise rate cut.  (For those who monitor
the Semiconductor Sector (SOX.X) closely, I think a COMPX at
2200 would closely coincide with a SOX at 700.)

As for the downside, or support levels, keep a close eye on
the 2050 - 2075 area in the COMPX.  A breakdown below that
level could carry the COMPX back down to the critical 2000
level, which has already been tested twice in as many weeks.
Some technicians might argue that each additional test of a
support level inherently weakens it, so keep that in mind
if/when the COMPX approaches 2000.



In addition to the price action I've addressed, I thought it
might be prudent to peak into the market's current
psychology in the form of the Market Volatility Index (VIX.X).
The VIX has precipitously fallen from its relative highs around
the 40 level and is approaching the lower-end of its two-year
trading range, which is marked by the 20 level.  To me, the
sharp pullback in the VIX indicates complacency in the market,
or a lack of fear.




And we can draw two conclusions from the slide in the VIX:
First, there's no reason to be afraid any longer as the economy
is beginning to turn and corporate profits will soon follow.
Second, market participants have become too complacent and the
shorts are lying patiently in the shadows, waiting to take the
market back down.  I don't know which of the two scenarios are
going to come to fruition.  But, my sense is that the market
will become very news and event driven as participants await
for confirmation on the economic front and catalysts in terms
of corporate earnings.

Although we're winding down to the last days of first-quarter
earnings season, the market will want to hear of continued
improvements on the profit front starting in the second-quarter.
And by improvements, I don't necessarily mean second-quarter
earnings.  Rather, the guidance that CEOs give the market going
out six to nine months.  For example, officials at data storage
giant, Emc (NYSE:EMC), recently stated that they were beginning
to see a slight up-tick in demand.  And it's that type of
improvement the market will want.  We have to take the recent
advance, especially in the Nasdaq, in context in that the
move was predicated upon the thought that fundamentals in
corporate America would begin improving in the not too
distant future.  And if we get a host of fresh earnings
warnings and gloom speak in the coming month, the recent
ramp in the broader markets is likely to reverse.  After
all, advance in price HAS to be supported with an advance
in future earnings!

On the economic front, the market wants confirmation that the
U.S. economy is rebounding and we'll be getting several
crucial data points this week concerning that very subject.
As I previously mentioned, the National Association of
Purchasing Managers Index (NAPM) is slated for release
Tuesday morning.  Forecasts call for a reading of 43.9 for
the month of March.  In addition, the April Non-farm payrolls
number is scheduled for release Friday morning, with
expectations for the economy to add 27,000 jobs and for the
jobless rate to rise to 4.4 percent.  The jobs report is the
biggest economic indicator before the Fed's May meeting and,
for that reason, will be closely watched by the market Friday.

Barring any major disappointments in terms of either
earnings or economic news, the broader market averages are
likely to remain in consolidation mode as we've just
witnessed an awful big advance.  Of course, surprises to the
upside on the economic and profit fronts will provide the
catalyst to further advance the markets, hence my urging
readers to pay close attention to news and events.
Furthermore, the longer the markets stay in this consolidation
mode, the stronger the rally once a catalyst is produced.
Having said that, I think a prudent strategy relative to
current conditions is to focus on quality names across the
majority of sectors in the market from the long side.  And I
think that OptionInvestor has a good representation of
quality on its call list in the forms of AOL Time Warner
(NYSE:AOL), American Eagle Outfitters (NASDAQ:AEOS), Eli
Lilly (NYSE:LLY), Alcoa (NYSE:AA) and Citigroup, although the
latter traded poorly Monday.  I'm by no means recommending
to go out and recklessly buy these names, as I have no way
of quantifying each of my readers' risk tolerance and/or
time horizons.  Rather, my point is turn my readers' focus
to the types of stocks in the market that are trading well
and are likely to continue to work higher in light of the
potential for a rebound in the economy and benign monetary
environment.  And with the exception of the minor red
flags in the financial pullback Monday and the VIX, the
bias appears to be slightly titled to the upside, from where
I sit.

Eric Utley
Assistant Editor


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**************
NEW CALL PLAYS
**************

FDC - First Data Corporation $67.44 +1.04 (+1.04 this week)

First Data is the remarkably efficient, often invisible engine
powering today's global shift to a cashless economy.  They
process and safeguard every type of electronic payment method:
credit, debit and stored-value cards, electronic checks and
cash.  They also provide Electronic Funds Transfers to 75
percent of the world and provide card issuer services for
1,400 financial institutions and 396 million consumers
worldwide. And, through their visionary Internet Commerce
Group, they are developing advanced services and solutions
that help financial institutions, merchants, business and
consumers access the power and possibilities of the Internet.

Strong earnings, positive momentum and analyst upgrades go a long
way in helping a company's stock price to move higher.  With a
stellar earnings report earlier this month, a break to a new
all-time high and a recent upgrade from Merrill Lynch, electronic
transaction giant FDC has rewarded its shareholders handsomely.
The stock has been in a strong upward trending regression channel
since Fall of last year.  A low-volume pullback last week to the
10-dma in a consolidation move has appeared to give shares of FDC
the fuel needed for another leg up.  News that the company had
completed its purchase of financial processing software firm
PaySys International helped the stock to move higher to start off
the trading week.  Today's gain of 1.57 percent on 72% of the
average daily volume meant another new all-time high for FDC.
While we would have liked to see more volume accompanying the
breakout, this was a bullish move considering that other
three-letter NYSE stocks were showing weakness.  A bullish surge
above today's intra-day high of $67.62 on volume could allow
conservative traders to enter on strength, but make sure that
competitors FISV and PAYX confirm upward momentum.  For higher
risk players looking for entries on dips, look for horizontal
support at $67, $66 and $65.  Moving average support may also be
found at the 5 and 10-dma at $65.40 and $65.05 respectively.  We
are placing a protective stop at $65.  Make sure that FDC
continues to close above this point or we will have little choice
but to drop coverage.

BUY CALL MAY-60 FDC-EL OI=2059 at $8.20 SL=6.00
BUY CALL MAY-65*FDC-EM OI=3192 at $3.90 SL=2.50
BUY CALL MAY-70 FDC-EN OI=1761 at $1.10 SL=0.00  Aggressive!
BUY CALL JUN-65 FDC-FM OI= 947 at $5.30 SL=3.50
BUY CALL JUN-70 FDC-FN OI= 261 at $2.75 SL=1.50

http://www.premierinvestor.com/oi/profile.asp?ticker=FDC


BRCD - Brocade Communications $37.99 +2.37 (+2.37 this week)

Brocade Communications is a provider of Fibre Channel switching
solutions for Storage Area Networks (SANs), which apply the
benefits of a networked approach to the connection of computer
storage systems and servers.  The company's family of SilkWorm
switches enables companies to cost-effectively manage growth in
their storage capacity requirements and improve the performance
between their servers and storage systems.  This provides the
ability of increasing the size and scope of a company's SAN,
while allowing them to operate data-intensive applications,
such as data backup and restore, and disaster recovery on the
SAN.

Oh, how the mighty have fallen.  Even the high-flying Storage
stocks have been stripped of their exorbitant PE ratios in the
recent economic slowdown.  Of course, all things are relative,
as BRCD still sports a PE ratio of 100!  Since bottoming in
early April at $16.75, the stock has tacked on a gain of more
than 125% in four short weeks, and seems anxious to continue the
recovery.  With that being said, keep in mind that profit taking
can appear at any time, and after such a dramatic rise, the
bears are likely salivating at the juicy profits they think they
are going to get.  Despite lowered estimates on BRCD, EMC and
NTAP on April 12th, and BRCD's own 2nd quarter earnings warning
on April 20th, investors have continued to accumulate the stock,
fueled in large part by the Fed's surprise interest rate cut.
The uptrend line, along with intraday support rest right at $35,
and barring a major correction in the Technology sector should
continue to support the stock as we approach the company's
earnings announcement on May 15th.  Use intraday bounces near
this level as an opportunity to initiate new positions, with
stops set at $35.  While a break above the $40 resistance level
can also provide for new entries, be careful of the looming
upper Bollinger band at $40.80 - it could act as a temporary
barrier to a continuation of BRCD's upward momentum.  Keep an
eye on other stocks in the sector like EMLX, EMC and QLGC.
These stocks all seem to trade as a group, sharing both
strength and weakness.

BUY CALL MAY-35*UBF-EG OI=6927 at $5.90 SL=4.00
BUY CALL MAY-40 UBF-EH OI=1926 at $3.40 SL=1.75
BUY CALL JUN-40 UBF-FH OI= 159 at $5.60 SL=3.50
BUY CALL JUN-45 UBF-FI OI= 130 at $3.60 SL=1.75

http://www.premierinvestor.com/oi/profile.asp?ticker=BRCD


************
NEW PUT PLAY
************

TBL - Timberland Co. $49.32 +2.52 (+2.52 this week)

Timberland is a global leader in the design, engineering and
marketing of premium quality footwear, apparel and accessories
for consumers who value the outdoors and their time in it.
Timberland products offer quality workmanship and detailing
and are built to withstand the elements of nature.  The company's
products can be found in leading department and specialty
stores as well as Timberland retail stores throughout North
America, Europe, Asian, Latin America and the Middle East.

Timberland has been forming a downward stair step pattern with
a series of lower highs and failed rallies since early January.
While RLX.X made a dramatic turnaround from April 18th to April
20th, and crossed its 200 dma of 838.61 and 50 dma of 851.82,
TBL did not participate in this rally, which is testimony to
its underlying technical weakness.  TBL announced good
earnings on April 19th, and promptly sold off dramatically from
$50 to a low of $42.63 on April 24.  While TBL rallied to
current levels during the rallies in the broad indexes as well
as the retail sector over the last several days, the stock is
now technically positioned to sell off, particularly if RLX.X
continues to roll over from current levels.  Connecting the
highs and the lows since early January reveals an unmistakable
downward channel in TBL, and today the stock closed right
below the 200 dma of $49.42.  In addition, RLX.X failed to
hold above the 900 level, and is now likely to drop to the
next support level at 870, and possibly to the 50 dma of 851.
Consider taking positions in TBL upon a roll over from the
current level if RLX.X is falling.  A break below $48.86 with
strong volume could be another entry point.  Keep an eye on
the specialty apparel footwear sector, and others like NKE
and RBK.  We are setting closing stops at $51.

BUY PUT MAY-50*TBL-QJ OI= 22 at $3.10 SL=1.50
BUY PUT MAY-45 TBL-QI OI=198 at $1.15 SL=0.75

http://www.premierinvestor.com/oi/profile.asp?ticker=TBL


*****************
STOP-LOSS UPDATES
*****************

AEOS - call play
Adjust from $36 up to $37

AOL  - call play
Adjust from $47 up to $49

BRCM - call play
Adjust from $35 up to $39

LLY  - call play
Adjust from $80 up to $83


*************
DROPPED CALLS
*************

WMT $51.74 -1.09 (-1.09) Walmart made impressive gains in the
brief period during which we have been covering this play, as the
stock reached a high of $53.30 today.  However, profit taking
in the Dow as well as sector rotation into technology stocks
seems to have temporarily dampened investors' enthusiasm in WMT.
In addition, RLX.X failed to sustain a rally past the 900
level, which contributed to the late day sell off in WMT.  While
WMT is still above its 50 and 200 dmas, it closed below our
stop level of $52, and so we are dropping it tonight.


************
DROPPED PUTS
************

CIEN $55.06 +4.77 (+4.77) While CIEN dropped below an important
support level at $50 last Friday, today's JP Morgan - H & Q
Technology Conference seems to have temporarily turned the tide.
Bullish comments made by the company management as well as
analysts lit a fire under the networking sector today, as NWX.X
gained over three percent.  NWX.X is still below its 50 dma of
468.42, however, CIEN closed above our stop level of $52, and,
as such, we are dropping it as a play tonight.

PDLI $64.25 +5.12 (+5.12) When we set up this play on Sunday, we
mentioned that the 100-dma (now at $61.18) could act as
formidable resistance to the stock, since PDLI has been unable
to surpass above this moving average since late last year.
However, a strong day for the Biotech sector along with coverage
initiated by CS First Boston with a Buy rating helped PDLI to
take out the 100-dma along with horizontal resistance at $60 and
our stop price of $61, gaining 8.66% on 1.45 times the average
daily volume.  With the stock now out of our price bracket and
recommended entry points not forthcoming, we are dropping
coverage.

VTSS $33.90 +2.95 (+2.95) Even a weak stock in a strong sector
benefits from the movement of its peers.  While VTSS is still
encountering formidable resistance from its 50-dma (now sitting
just above at $34.96), strength in the Chip stocks today, as
measured by the Philadelphia Semiconductor Index (SOX), helped
the communications chipmaker to advance almost 10 percent.
While trading volume was light, only 75 percent of the average
daily volume, support lies directly below, with the 5 and 10-dma
at $31.85 and $31.86 respectively.  Closing above our stop price
of $33 suggests that VTSS could break to the upside and as such,
we are no longer recommending this play.

AMD $31.00 +1.00 (+1.00) Setting a new record for the trip from
New Play to Drop, AMD shot right out of the gates this morning,
shattering our stop at the open.  Although there was a slight
retracement in the afternoon, it bounced right at $30.50,
turning what we thought would be resistance into support.  With
analysts like Jonathan Joseph proclaiming that the Semiconductor
industry will bottom this summer, it's hard for the bears to
gain any traction, and we clearly need to drop it tonight.

PMCS $41.60 +3.65 (+3.65) We've been picking on PMCS for a
little over a week, and today the bulls finally picked back.  We
had a nice ride down from the $45 level all the way to $35 where
the stock eventually found support.  Closing at the high of the
day on Friday, we thought we might get one more entry into the
play but it wasn't to be.  The entire Semiconductor shot up
right from the opening bell today, and PMCS opened the day above
our $39 stop and never came close to it again, ending the day
with a nearly 10% gain.


**************
TRADERS CORNER
**************

Dow Theory: Part II
By Molly Evans

This is Part Two of Three defining and discussing Dow Theory.

Last week, the father of Dow Theory was introduced.  Charles Dow,
the modest journalist yet brilliant market observer who founded
The Wall Street Journal in 1889, has left a legacy of market lore.
In Part I of this series, the first two of six assumptions of Dow
Theory were presented:

1) Price movement represents the aggregate knowledge of Wall
Street and, above all, its aggregate knowledge of coming events.
In other words:  The averages discount everything.

2) There are, simultaneously, three movements in progress in the
stock market.  The primary trend which is either bullish or
bearish depending upon the course of higher highs or lower lows.
These are the long-term trends that last a year to several years
or more and is also known as the "secular trend."  The secondary
trend is represented by sharp rallies in bear markets and
conversely, sharp corrections in a bull market.  These are the
trends that last a couple of weeks to a month or even more.  The
third trend is the day-to-day fluctuations.

Now, to continue the examination of Dow Theory, the remaining
four assumptions are discussed in the remainder of this article.

3) The primary trends have three phases.  This implies a
cyclical phenomenon.  William Peter Hamilton was Dow's understudy
and would later become the executive editor of both the Wall
Street Journal and Barron's.  Hamilton further advanced principles
of Dow's theory in his own writings.  Said Hamilton, "Prosperity
will drive men to excess, and repentance for the consequence of
those excesses will produce a corresponding depression.  Following
the dark hour of absolute panic, labor will be thankful for what
it can get and will save slowly out of smaller wages, while capital
will be content with small profits and quick returns."  Hamilton
went on to make an example of the reorganization of the American
railroad companies after the panic of 1893.

Describing the market of the early 1920's, Hamilton wrote this
about the second and third phases of a trend, "Presently we wake
up to find that our income is in excess of our expenditure, that
money is cheap, that the spirit of adventure is in the air.  We
proceed from dull or quiet business time to real activity.  This
gradually develops into extended speculation, with high money
rates, inflated wages and other familiar symptoms.  After a period
of years of good times the strain of the chain is on its weakest
link.  There is a collapse like that of 1907, a depression
foreshadowed in the stock market and in the price of commodities,
followed by extensive unemployment, often an actual increase in
savings-bank deposits, but a complete absence of money available
for adventure."

To recap, the first phase is one of doom and gloom and disgust
for the market.  However, informed investors, realizing a
turnaround is inevitable buy aggressively from distressed
sellers.  The second phase is characterized by improved
economic conditions and increasing corporate profits.  Some
investors will begin to accumulate stock as the conditions
improve.  The third phase is the peak of the economic state,
corporate earnings are at record levels and the general public,
having forgotten their last humbling in the market, feels
comfortable and excited to participate in the market.  They
create a buying "panic" and are more than happy to buy from
those few investors who did the aggressive buying during the
first phase.

4) The Dow Industrials and the Dow Transports must confirm each
other.  Dow contended that the transports were such a formidable
force in and of themselves that the two averages must be in
sync with one another to confirm or signal a change in trend.
In keeping with this, may it be said that both averages must
extend beyond their prior tops or bottoms to pronounce a change
of trend.

5) While Dow Theory is primarily centered around price action,
volume is a secondary consideration in the evaluation of trends.
This is very simple.  If the trend is down, volume should be
confirming that trend by increasing on down days.  Conversely,
if the trend is up, volume should expand during market advances.

6) A trend is to be considered intact until a valid signal of
change is given.  What is an up trend?  A series of higher highs
and higher lows.  That trend is changed when there is at least
one lower high and one lower low while the reverse is true of
a downtrend.  With this in mind, Dow advocated that the
likelihood of a trend extending itself was greatest when the
trend was signaled by both the Dow Industrials and the Dow
Transports.

In the third part of this series, examples of the Dow assumptions
in today's market will be examined.  Let's see if we can't
let the long-gone eyes of Charles Dow assess our current market
conditions.

See you then.

MKE


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**********************
PLAY OF THE DAY - CALL
**********************

AOL - AOL Time Warner Inc $50.50 +0.51 (+0.51 this week)

AOL Time Warner is the result of a 2001 gargantuan merger that
married the world's largest online company with a media giant.
America Online brings its flagship online service, CompuServe,
Netscape, and several interactive online services whilst Time
Warner's contributions span films and TV, music, cable networks
and systems, publishing, and professional sports.  AOL Time
Warner's brands include Time Warner Cable, Warner Brothers,
Warner Music, HBO, Turner, America Online, CNN, New Line Cinema,
and Time Inc.

Most Recent Write-Up

So close we can almost taste it!  We're looking, and patiently
waiting, for that visible breakout through the $50 resistance.
Currently, the 200-dma ($48.86) is towing the mark as shorter-
term support.  Volume remains healthy, but AOL needs to explode
upward and fast. Time is money.  AOL continues to lead the media
stocks sideways, and slightly higher, while the technology
market dallies in its limbo.  Specifically in the case of AOL,
the trading pipeline further narrowed itself last week.  The
previous near-term bottom at $47, which was in-line with the 10-
DMA, shifted higher.  On Thursday and Friday, the converged 5 &
200 DMAs at $48.77 and $48.86, respectively, bolstered the share
price.  The fractional cracks through the $50 obstacle lend to
the probability of a powerful run, but we'll need the
combination of sector and market strength to provide the
underlying momentum.  The coil is tightening.  If your risk
portfolio allows for some speculation, you might consider taking
positions near the $48 level.  Keep a close watch on other
related stocks like GMST, COX, UVN, V, and DIS to provide
additional insight before beginning plays.  Going forward, we're
maintaining our protective stop at $47 and will exit if AOL
closes below this mark.

Comments

AOL finally broke and subsequently settled above the $50 level.
This may attract new longs into shares of the media giant and
provide traders with a favorable risk/reward dynamic.  Look for
bounces off the $50 level early Tuesday for new long entries.
For those who'd rather trade momentum, wait for the stock to
break above the $51 level on active volume before entering any
positions.

BUY CALL MAY-45 AOE-EI OI=15557 at $6.40 SL=4.25
BUY CALL MAY-50*AOO-EJ OI=29190 at $2.60 SL=1.25
BUY CALL JUN-45 AOE-FI OI=  365 at $7.30 SL=5.25
BUY CALL JUN-50 AOO-FJ OI= 1834 at $3.90 SL=2.25
BUY CALL JUN-55 AOO-FK OI= 5634 at $1.65 SL=0.75  Aggressive!!

http://www.premierinvestor.com/oi/profile.asp?ticker=AOL


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