Cashflow Report – Portfolio Income During November 2012

Welcome to the Investing for Cashflow Report – November 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report” (hat tip to Pat Flynn over at Smart Passive Income). Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports do the following:

  1. Help me track my progress towards financial independence
  2. Maintain my focus on increasing paper income and meeting my goals each month
  3. Provide an example of creating an income from investing/trading (actually making money!)
  4. Get your feedback on ways to improve

Enjoy!

Overview of November 2012

The general markets (DJIA, NASD, SP500) recovered from the October downtrend, making their way back to their respective 50 day moving averages.

Insights & Lessons Learned in November

I learned that my trading system isn’t as automated as I thought. I spent most of the month away from my trading desk, and subsequently missed out on some opportunities. This is a big miss because the market has been so choppy; opportunities have a very high probability of being short-term. On the plus side, I may have missed an exit signal as well, given my time constraints and inability to monitor the market daily.

Cashflow Report – Portfolio Income During November 2012 – Breakdown:

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

ERX-Direxion Daily Energy Bull 3X Shares (ETF)

Premiums = $0.00
Dividends = $0.00

FAS-Direxion Daily Financial Bull 3X Shares (ETF)

Premiums = $0.00
Dividends = $0.00

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $2.30
Dividends = $0.00

Cashflow = $224.35
Estimated October Capital Gains/Losses = ($278.94)

Goal Not Achieved

The month ended with TMF below my purchase price. My account balance shows a loss because the option premiums weren’t high enough to offset the loss in ETF value. This seems to be a recurring theme this year!

Bar chart showing year to date returns from covered calls

GOAL: Execute a covered call trading strategy that creates PROFIT greater than $3,600 USD per month and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

With all the fiscal cliff talk, it is hard to separate the wheat from the chaff, so to speak. The markets have been in rally mode since the middle of November, volume has remained lower than average. To me, this indicates a lack of selling, rather than a large amount of buying.

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Cashflow Report – Portfolio Income During October 2012

Welcome to the Investing for Cashflow Report – October 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report” (hat tip to Pat Flynn over at Smart Passive Income). Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports do the following:

  1. Help me track my progress towards financial independence
  2. Maintain my focus on increasing paper income and meeting my goals each month
  3. Provide an example of creating an income from investing/trading (actually making money!)
  4. Get your feedback on ways to improve

Enjoy!

Overview of October 2012

The geneal markets (DJIA, NASD, SP500) entered a downtrend in October after running into institutional selling early on. And we had a shortened trading month with the markets closed in the aftermath of Hurricane Sandy.

After moving sideways for half the month, DRN solidified a new downtrend, as did ERX. EDC and FAS continued to find support around the 90 and 110 dollar level, respectively. TMF seems to have found support around $70 and may be ready to start a new uptrend in November.

Insights & Lessons Learned in October

My new method for creating trendlines appears to be working.  I avoided a capital loss of at least 10% last month on ERX.  I’m hopeful that it will work just as well on the profit side!  However, my trading will be less consistent, meaning that I won’t always be in the market.  I’m not sure how that will affect my ability to make money each month.

Cashflow Report – Portfolio Income During October 2012 – Breakdown:

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

ERX-Direxion Daily Energy Bull 3X Shares (ETF)

Premiums = $0.00
Dividends = $0.00

FAS-Direxion Daily Financial Bull 3X Shares (ETF)

Premiums = $0.00
Dividends = $0.00

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $0.00
Dividends = $0.00

Cashflow = $0.00
October Capital Gains/Losses = $50.31

Goal Not Achieved

After all was said and done last month, I ended up with a $50 capital gain on my ERX trade. Not even close to my goal, but it wasn’t a loss either!

Bar chart showing year to date returns from covered calls
GOAL: Execute a covered call trading strategy that creates PROFIT greater than $3,600 USD per month and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

I’m continuing to monitor EDC and FAS.  They’re both close to my trendlines, so now is a good time to enter a position.  But only two weeks left to option expiration for November, I’ll have to make sure that the premiums will cover potential losses.

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Cashflow Report – Portfolio Income During September 2012

Welcome to the Investing for Cashflow Report – September 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report” (hat tip to Pat Flynn over at Smart Passive Income). Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports do the following:

  1. Help me track my progress towards financial independence
  2. Maintain my focus on increasing paper income and meeting my goals each month
  3. Provide an example of creating an income from investing/trading (actually making money!)
  4. Get your feedback on ways to improve

Enjoy!

Overview of September 2012

Not a lot going on in September.  I guessed correctly that the markets would rise due to the European Central Bank and US Fed actions, but that is not an investing strategy. So I remained on the sidelines for most of the month, and let the QE events unfold.

The general markets (DJIA, NASD, SP500) were pretty quiet last month.  Trading volume remained lower than average and prices rose in small increments when not reacting to the news.

Insights & Lessons Learned in September

I spent some time playing with spreadsheets last month, trying to creating new entry and exit signals. I ended up going with some really basic trendlines, so I no longer have to draw them by hand. You can see the results of my efforts in September’s last technical analysis.

The spreadsheets use actual closing prices, and then I played connect the dots for short term and mid term trends. Taking the change in price between two lows (or highs) and dividing it by the number of trading days in between gives me a price change per day. I then extend the price forward in time to the next option expiration date, creating a trendline and giving me stops for my underlying positions.

Not only do I have price targets for my stops, but I also can calculate how far away from the trendline an ETF is currently trading. This will be great for determining whether the covered call trade is worth the risk. I already calculate the percent return provided by covered call premiums. Now, I can compare that to the loss I would need to endure before the underlying ETF reached the trendline (i.e. my new stop price). If an ETF is 15% above its trendline and the covered call only yields 5%, the overall trade could lose 10% before the ETF found support or broke the trendline.

Don’t get me wrong here. Leveraged ETF’s are volatile, so this new trendline calculation is not fool-proof…it is just more responsive than my other program and allows me to control my losses a bit more.

Cashflow Report – Portfolio Income During September 2012 – Breakdown:

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

ERX-Direxion Daily Energy Bull 3X Shares (ETF)

Premiums = $209.36
Dividends = $0.00

FAS-Direxion Daily Financial Bull 3X Shares (ETF)

Premiums = $173.36
Dividends = $0.00

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $0.00
Dividends = $0.00

Cashflow = $382.72
Estimated Capital Gains/Losses = (307.05)

Goal Not Achieved

My ERX position was down ~$2 at the end of the month and my earlier FAS position ended up with a small capital loss on the underlying position. So my actual return came out pretty small. We’ll have to see where ERX ends up this month before calling it a wash.
 
Bar chart showing year to date returns from covered calls
GOAL: Execute a covered call trading strategy that creates profit greater than $3,600 USD per month and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

I kicked off September with one position in FAS (which was assigned), and then waiting for the smoke to clear from the QE craze that took hold. Towards the end of the month, I took my own advice and entered a position in ERX when it found support at my newly designed trendline.

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Cashflow Report – Portfolio Income During August 2012

Welcome to the Investing for Cashflow Report – August 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report” (hat tip to Pat Flynn over at Smart Passive Income). Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports do the following:

  1. Help me track my progress towards financial independence
  2. Maintain my focus on increasing paper income and meeting my goals each month
  3. Provide an example of creating an income from investing/trading (actually making money!)
  4. Get your feedback on ways to improve

Enjoy!

Overview of August 2012

August saw TMF move against my covered call position, wiping out the rest of my profit for the year.  And I am now into my 5th month of sub-par returns.  Considering the Buy/write index (Powershares ETF – Ticker PBP)  is only up 4% this year, I’m not doing too badly…but that doesn’t mean I’m happy with my performance either.

The general markets (DJIA, NASD, SP500) were pretty quiet last month.  Trading volume remained lower than average and prices rose in small increments.

Lessons Learned in August

My 2012 experiment of using my trading program to capture capital gains  is not working.

As I’ve mentioned before, leveraged ETFs inherently have a lot of price volatility.  That volatility is the reason I can generate large percentage returns selling calls each month.   However, the capital losses that can result from holding these ETFs for a month is usually larger than the potential cashflow.

A pattern has emerged, and it follows a sequence:

I buy a leveraged ETF and sell a call.   In order to maximize cashflow, I could sell the first in the money call.  In order to maximize capital gain, I could sell the first out of the money call (assuming my first priority is still cashflow).  The ETF falls in price.  The price drop is large enough to absorb all the income from selling a call, resulting in an overall loss on the trade.  The option expires, and I am left with an ETF that is trading at a price well below my purchase price.  I sell another call for the next month, but the 2nd premium is not large enough to offset the first loss.

Before January 2012, I held risk-adjusted positions in all 5 ETFs.  At the beginning of each option cycle, I would sell calls against all 5 positions.  During downtrends in the general markets, in the money calls were used.  During up trends, near the money calls were used.  Usually, the ETFs did not fall at the same time, so the cashflow from selling calls covered most of the capital losses (if any) each month.

The 2012 adjustment attempted to lock in more “capital gains”.  I used risk adjusted positions in the 5 ETFs, but only if the ETFs had generated a buy-signal from using a price channel.  I would also close out a position if a sell signal was generated.  After a review of my results this year, I’ve noticed that using my price channel program has limited capital losses AND gains.  Because of the volatility, leveraged ETFs can recover from large drops in price very quickly (minor uptrends) and offer potentially profitable trades that I do not capture.

By limited the number of ETF’s I own, the diversification offered by holding all 5 ETFs is lost.  When I first started out, I had money in all 5 positions.  Some were up, some were down, but in the end, I was usually coming out ahead.  Now, I am only in 1 or 2 etf’s because I do not have a buy signal.  So when I lose money on one trade, I do not have the premiums/gains from other trades to reduce the losses.

Live and learn.  I need to use different signals – to come up with a new way to determine when a leverage ETF is a “buy” and when it is a “sell”.   At this time, my simple trend lines do a better job than price channels, so I will return that that for the time being while I evaluate other techniques.

I also need to focus less on capital gains, and more on limiting losses.  Capital gains are nice, but “investing for cashflow” was intended to create an asset that could fluctuated in value and still produce cashflow every month.  If I want to make money with capital gains, I should just trade equities and not worry about options.

Another important lesson learned is the number of months that could pass between hitting my cashflow goals.  Right now, I would need at least a 7 month cushion ($25,200) just to cover expenses…and that doesn’t include the losses from trading.

Cashflow Report – Portfolio Income During August 2012 – Breakdown:

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

ERX-Direxion Daily Energy Bull 3X Shares(ETF)

Premiums = $0.00
Dividends = $0.00

FAS-Direxion Daily Financial Bull 3X Shares(ETF)

Premiums = $347.72
Dividends = $0.00

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = ($36.31)
Dividends = $0.00

Cashflow = $311.14
Capital Gains/Losses = ($5,094.81)

 

Goal Not Achieved

GOAL: Execute a covered call trading strategy that creates profit greater than $3,600 USD per month and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

I am kicking off September with nothing on the balance sheet. I’ve been trading weekly FAS options due to their short duration.  I don’t feel comfortable entering longer-term positions. Between the Fed’s upcoming announcement about QE and the uncertainty surrounding ECB/Germany monetary actions, I’m content to sit on my hands see what happens.

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Cashflow Report – Portfolio Income During July 2012

Welcome to the Investing for Cashflow Report – July 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report” (hat tip to Pat Flynn over at Smart Passive Income). Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports do the following:

  1. Help me track my progress towards financial independence
  2. Maintain my focus on increasing paper income and meeting my goals each month
  3. Provide an example of creating an income from investing/trading (actually making money!)
  4. Get your feedback on ways to improve

Enjoy!

Overview of July 2012

I wish I had something new to report.  I wish that July was a fantastic month.  But wishing is not an investing or trading strategy.  I am now on my 4th month of sub-par returns.

The general markets have whipsawed back and forth since late March, which would normally be a good thing for covered calls.  However, using leveraged ETF’s has been as difficult as the market has been irrational.  Actually, I was looking good heading into the last week of the month.  I just couldn’t hold onto those capital gains.

Lessons Learned in July

Since this is the 4th month in a row of poor returns, it is time to evaluate my strategy again.  This is a habit I picked up from IBD.  After 3 straight losing trades, they recommend regrouping and figuring out what you’re doing wrong.

I started tracking my “return on investment” a few months ago to try and get a better sense of my performance.  A large portion of my portfolio has been on the sidelines, so it makes sense to evaluate my gains based on the money I have at risk in the market (cashflow + capital gains).

Jan =10.5%
Feb = 4.8%
Mar = 8.6%
Apr = 0.5%
May = -18.1%
Jun = -1.1%
Jul = 0.8%

As you can see, May was a pretty bad month with an 18% loss.  But that doesn’t tell the whole story, because I had very little money in the market.  So the return was small, but so was the position.  A positive takeaway is that I made the right decision by lowering the amount of money I had at risk.

Since my goal was to have $100,000 in a trading account (the level I thought was necessary for naked options), I used that number to calculate my “return on assets”, which shows the impact that my trading would have on an account with $100,000.  Here, the maximum loss I should ever see is 10%, since 2% is the max loss per position and I can hold up to 5 positions.

Jan = 3.7%
Feb = 2.1%
Mar = 2.1%
Apr = 0.1%
May = -3.0%
Jun = -0.2%
Jul = 0.3%

May was the only loss above 2%.  Since I held 3 positions at the start of the month and 2 ended up hitting sell limits, a 3% loss is within the loss limits I set.

Based on these numbers, my risk management system seems to be working correctly.

Cashflow Report – Portfolio Income During July 2012 – Breakdown:

Realized Paper Income Gains

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $363.72
Dividends = $0.00

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

ERX-Direxion Daily Energy Bull 3X Shares(ETF)

Premiums = $0.00
Dividends = $0.00

FAS-Direxion Daily Financial Bull 3X Shares(ETF)

Premiums = $0.00
Dividends = $0.00

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $553.67
Dividends = $0.00

Realized Cashflow = $917.39
Capital Gain = ($599.11)
Profit = $348.28 (0.8% Return on Invested Capital)

Goal Not Achieved

Portfolio Income for July 2012 - Investing for Cashflow

GOAL: Execute a covered call trading strategy that creates profit greater than $3,600 USD per month and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

One week into August and TMF is already falling.  Hard.  I could end up with another ugly month in August.  As bad as the last few months have been, they will lead to a better trading system overall.  And so far I’m still in the black for the year, so I can’t complain too much.  In the meantime, I’ll just keep plugging away.

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Cashflow Report – Portfolio Income During June 2012

Welcome to the Investing for Cashflow Report – June 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report”. Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports do the following:

  1. Help me track my progress towards financial independence
  2. Maintain my focus on increasing paper income and meeting my goals each month
  3. Provide an example of creating an income from investing/trading (actually making money!)
  4. Get your feedback on ways to improve

Enjoy!

Overview of June 2012

June was similar to May, which was similar to April, which was similar to…it just hasn’t been a great start to the year for my covered call experiment.

The general markets have trended downward since mid-March, and subsequently DRN, EDC, ERX, and FAS became unplayable (generated a sell signal in my trading system). TMF emerged with the only buy signal, and as a result, my cashflow are based on that position only.

Lessons Learned in June

Long term success requires different methods at different times. After taking a look at my performance to goal for the first 6 months of the year, it is clear to see that my system has not worked very well since the March-April time-frame (March cashflows were good, but that also means that my positions were set going into April). The general stock markets peaked in March and have fallen since.

A key part of my strategy is consistency (Consistent = Sell covered calls profitably in all market conditions). Based on 2012, my current strategy is yielding positive results only when markets are rising. When markets are falling, the price drops in leveraged ETFs wipe out any potential for positive cashflow from selling calls.

On the positive side, my added attention to capital gains (or avoiding capital losses) has kept losses small so far this year…much smaller than had I tried to sell calls as the leveraged ETF’s fell. I haven’t gone “all-in” either, so I do not know the monthly cashflow I can expect to achieve. It could be large enough to cover months when I am out of the market, which would make these periods easier to stomach.

Cashflow Report – Portfolio Income During June 2012 – Breakdown:

Realized Paper Income Gains

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

ERX-Direxion Daily Energy Bull 3X Shares(ETF)

Premiums = $0.00
Dividends = $0.00

FAS-Direxion Daily Financial Bull 3X Shares(ETF)

Premiums = $0.00
Dividends = $0.00

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $593.67
Dividends = $0.00

Realized Cashflow = $593.67
Capital Gain = ($760.22)
Profit = ($166.55)

Goal Not Achieved

Portfolio Income for June 2012 - Investing for CashflowGOAL: Execute a covered call trading strategy that creates profit greater than $3,600 USD per month and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

Add June to the “bust” list; 3 straight months with capital losses gobbling up premiums generated by selling calls.  Again, I’m still in the black for the year (~5k) in terms of trading, but my monthly withdrawals ($21,600) have taken a rather large chunk of my trading capital.

July will start out in a confirmed uptrend (per IBD), given it is a holiday week, trusting the market action will be difficult.

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Cashflow Report – Portfolio Income During May 2012

Welcome to the Investing for Cashflow Report – May 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report”. Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports do the following:

  1. Help me track my progress towards financial independence
  2. Maintain my focus on increasing paper income and meeting my goals each month
  3. Provide an example of creating an income from investing/trading (actually making money!)
  4. Get your feedback on ways to improve

Enjoy!

Overview of May 2012

May was similar to April; the general markets spent a majority of the month in a correction.  EDC and ERX continued to fall in price.  DRN and FAS were unable to overcome the general selling pressure and rolled over.  TMF had a much better month, and is back in play after some stellar price action.

Lessons Learned in May

May was less about lessons learned and more about confirming previous “rules”…further proof that sell rules saved me from substantial losses.

Toward the end of February, I was writing about EDC trading in the 120’s and ERX reaching into the mid-60’s.  The end of March brought sell signals at $108.45 and $46.77  for EDC and ERX, respectively.   Those two ETF’s closed the month of May at $68.19 and $34.85, which means that they lost an additional 37% and 25% % since the sell signals…let along the late February prices.    So following the rules for each covered call (100 shares) saved me more than $4,000 in losses for EDC and $1,200 for ERX.

Based on those facts, one would think that using a mechanical trading system makes following the rules easy.  However, you (me) still have to enter the orders, which gives us both a chance to bend the rules based on our emotions.  Why would we (I) bend the rules you ask?  Because following the rules often means watching your gains get swallowed up while waiting for the next signal.

This is what happened with DRN and FAS.  This year’s focus on creating cashflow and capital gains has worked, but also means that I had capital gains to lose if the markets turned south.  And I made the situation worse by trying to make a quick buck and selling in the money calls, rather than just selling ASAP.  Instead of a little extra profit, I received DRN and FAS price drops below the strike of my ITM options, which just added insult to injury.

Cashflow Report – Portfolio Income During May 2012 – Breakdown:

Realized Paper Income Gains

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = ($5.02)
Dividends = $0.00

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00

ERX-Direxion Daily Energy Bull 3X Shares(ETF)

Premiums = $0.00
Dividends = $0.00

FAS-Direxion Daily Financial Bull 3X Shares(ETF)

Premiums = $752.43
Dividends = $0.00

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $663.09
Dividends = $0.00

Realized Cashflow = $1,410.50
Capital Gain = ($4415.33)
Profit = ($3004.83)

Goal Not Achieved

Portfolio Income for May 2012 - Investing for Cashflow

GOAL: Execute a covered call trading strategy that creates profit greater than $3,600 USD per month and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

April and May have been a bust, with capital losses gobbling up premiums generated by selling calls.  Fortunately, money management and my mechanical trading system have kept my positions to a minimum and limited the damage of falling share prices.   I’m still in the black for the year (~5k).  Not enough to pay the bills, but profit is profit.

I’m not holding my breath for June, in terms of getting back into DRN, EDC, ERC, and FAS.  The specter of a Greek default and exit from the Euro (being called “Grexit”) hangs overhead…not to mention the banking issues in Spain and Italy.  There are no good options across the pond, and the US economy isn’t exactly setting the world on fire either.  I expect the flight to safety to continue, causing further increases to TMF’s share price.

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