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Daily Intelligence Briefing - June 29, 2017

FEATURED TOPIC: CYBERSECURITY - THE GLOBAL RANSOMWARE EPIDEMIC IS JUST GETTING STARTED

MRP’s CYBERSECURITY theme got another boost this week as cybersecurity stocks surged on news that a new virus was wreaking havoc around the world. Petya is part of a new wave of ransomware attacks called “ransomworm”.  What makes it particularly vicious, is that it is designed to move across multiple systems automatically, rather than stay in one place.

As noted in our May 9 DIBs report, ransomware is now available for sale on the dark web, and can even be deployed with one click in some cases. The ease of access and deployment raises concerns that these types of attacks will become more prevalent and damaging. Yet, the public remains behind the curve on the matter of protection. Antivirus company, Avast, found that 38 million PCs scanned just last week still have not patched their systems against vulnerabilities that were revealed by last month’s WannaCry attacks.

Nevertheless, every new incident has led to increased installations of security updates and other related software. The International Data Corporation (IDC) estimates that organizations worldwide will spend $101.6 billion annually on cybersecurity software, hardware and services by 2020 compared with spending of $73.7 billion in 2016. These trends reinforce our recommendation to be LONG CYBERSECURITY.

HERE are some relevant articles on the subject (these stories are summarized in the TECHNOLOGY Section)


OTHER STORIES HIGHLIGHTED IN TODAY'S DIBS:

JOE MAC'S MARKET VIEWPOINT

CURRENT MRP THEMES

  CAPEX  (L)   Cybersecurity  (L)   Defense  (L)
  Emerging Markets  (L)   France  (L)   Gaming  (L)
  Gold  (L)   Homebuilders  (L)   India  (L)
  Oil Services & Equipment  (L)   Oil & U.S. Energy  (L)   Steel  (L)
  TIPS  (L)   Long Dated Treasuries  (S)   U.S. Financials  (L)
  U.S. Regional Banks  (L)   Value over Growth  (L)  

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP's compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

   MAJOR DATA POINTS Top   
   MARKETS Top   

Bonds - India's Offshore Bond Sales Jump as Modi Delivers Reforms

Indian companies are selling a lot more bonds overseas as reforms including a massive tax overhaul to make business easier are encouraging overseas buyers. Political stability under Prime Minister Narendra Modi and a “right direction on the economy” are giving confidence to international investors to buy Indian notes, according to A.S. Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors. Overseas issuance so far this year has risen to $7.2 billion, triple that of the first half of 2016, as the lowest spreads on Indian dollar bonds in a decade have spurred sales. B 

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Bonds - Energy Bonds Decouple From Junk Peers on Oil Retreat  

Oil’s plunge into a bear market has broken the link between bonds of junk-rated U.S. energy companies and their peers. The yield on a Bloomberg Barclays index of high-yielding energy-company debt has jumped 1 percentage point in the past month, while the average yield on a junk bond index that excludes energy companies has barely moved. A drop in oil prices below $35 a barrel may drive yields higher across the board, strategists at Deutsche Bank AG said in research note this week. B 

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Gold - Gold edges higher as dollar faces further weakness  

Gold prices ended higher Wednesday as the dollar extended its decline, but strength in U.S. equities and Treasury yields served to cap the metal’s upside. Gold for August delivery on Comex rose $2.20, or 0.2%, to settle at $1,249.10 an ounce, while September silver advanced 14 cents, or 0.8%, to $16.791 an ounce. Looking ahead, Lukman Otunuga, research analyst at FXTM, said in a note Wednesday that gold is likely to remain supported “with the ongoing uncertainty of Brexit [the U.K.’s split with the European Union trading bloc], political risk in Washington and jitters from depressed oil accelerating the flight to safety.” MW

Copper - More Precious Than Gold? Copper’s the Better Inflation Hedge  

For centuries, gold has been a go-to asset among investors worried about all sorts of financial risks. In the past decade, exchange-traded funds backed by the metal drew more money than any other commodity. Even the world’s biggest central banks hoard bullion as a reserve asset. But when it comes to inflation, which can erode the value of portfolios that don’t keep pace with rising consumer prices, anyone who bought gold as a hedge over the past 25 years missed out on a much better deal -- copper. 

While data show that broad commodity indexes provided the best bang for the buck during periods of rising costs in the U.S., the red metal stands out. For every 1 percent annual increase in the consumer price index since 1992, copper jumped almost 18 percent, more than three times the 5.2 percent gain logged by gold, according to a correlation analysis of total return commodity indexes compiled by Bloomberg. B  

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Oil Futures - Oil's Record Bearish Bets Prompt Warning of Violent Rally  

On the surface, the oil market is getting worse and worse: there are now more bearish bets on benchmark Brent crude than at any time in at least six years. But to many traders, that’s a signal prices are vulnerable to a sudden, sharp rebound. Oil’s ripe for a so-called “short-covering” rally -- where traders who sold contracts hoping to benefit from falling prices buy them back to take profits or avoid losses. Short positions held by speculators in Brent rose to 169 million barrels last week, the highest since records started in 2011, according to exchange data.

Oil slumped into a bear market last week as physical oversupply and unexpected increases in U.S. inventories weighed on sentiment. Investors and analysts believe there is now a growing likelihood that futures will rebound sharply, without any change in market fundamentals. Yet, the oil market is increasingly driven by so-called Commodity Trading Adviser (CTA) funds, that buy or sell crude futures largely based on technical indicators. CTA funds had built a large short position in recent weeks and if that reverses it could trigger a short-rally, investors and traders said. B 

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   ECONOMICS AND TRADE Top   

U.S. Economy - U.S. trade deficit falls in May, advanced report shows

An early look at U.S. trade patterns in May points to a small decline in the nation’s trade deficit. The advanced trade gap in goods — services are excluded — fell by 1.8% to $65.9 billion in May, the U.S. Census Bureau said Wednesday. The government will release overall trade numbers for May next week, but the size of the trade deficit is generally tied to changes in exports and imports of goods. Trade patterns involving services rarely change much from month to month. A lower deficit gives a boost to gross domestic product, the official scorecard for the U.S. economy. MW

France Economy - Macron Confronts the ‘Mother of All Reforms’  

Just past day 50 since he was elected president, Emmanuel Macron is about to take on a problem that has  frustrated his predecessors: freeing up France's labor market. Macron, whose cabinet Wednesday approved a broad outline of changes to the labor code, wants the authority to negotiate the details over the summer with unions and business groups. The government would then introduce the new framework in September by decree, short-circuiting the legislative process.

After sweeping aside the establishment to claim the presidency and then cementing his dominance with a resounding majority in this month’s parliamentary elections, Macron intends to show France’s often frustrated European partners that he can deliver. The talks focus on three main areas: shifting some elements of labor contracts, such as working hours, from the industry level to individual companies; merging France’s myriad workers councils in companies, and setting upper and lower limits on severance pay to provide more visibility and security for employees and employers.  BBW

  POLITICS & FISCAL POLICY Top   

 

Defense - Canada and Europe's defense spending to rise faster in 2017 

 

Europe’s NATO members and Canada will jointly raise defense spending by 4.3 per cent in 2017, NATO Secretary-General Jens Stoltenberg said on Wednesday, partly aimed at showing the United States they are committed to shouldering more costsU.S. President Donald Trump has made more expenditure his priority for NATO, using his first alliance meeting in May to scold European leaders about spending, which is at historical lows and does not meet NATO‘s goal of 2 percent of GDP. This year’s increase represents the fastest spending growth since cuts stopped three years ago.

 

Figures for individual allies will be released on Thursday, after approval by NATO ambassadors, but overall 2017 spending will be some US$280 billion (CAD$371 billion), a cumulative US$46 billion (CAD$61 billion) jump since cuts left Europe without vital capabilities, such as refueling airborne fighter bombers. Global News

 
  MONETARY POLICY Top   

CBs - Equities Turn So Hot Even Central Bankers Are Taking Notice 

Stocks have become so expensive that central bankers are weighing in again. A chorus of policy makers has pointed to frothy asset prices this week, with the latest being Federal Reserve Chair Janet Yellen, who noted Tuesday that equity valuations are now “somewhat rich.” Stocks viewed on the basis of their estimated earnings are well above their 10-year averages in the U.S., Europe and emerging markets, while bond yields across the world remain near historic lows. While valuations have stayed lofty for some time without triggering a selloff, they’re now also accompanied by a weaker global economic backdrop that has already prompted caution from strategists at JPMorgan Chase & Co. Having rallied more than 30 percent from last year’s low, the MSCI All-Country World Index is within points of a peak reached earlier this month.

Leading the pack is the S&P 500 Index, which trades at 17.5 times its members’ projected earnings, or about 23 percent above its 10-year average. While investors have yanked money from funds tracking U.S. stocks in favor of cheaper markets elsewhere, the benchmark touched an all-time high last week and has fared better than most European markets in June. Analysts predict S&P 500 profits will climb 12 percent in 2017. All major U.S. equity benchmarks rebounded on Wednesday. B    

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CBs - Central bank shift weighs on dollar; stocks rise  

The euro hit a one-year high against the dollar on Wednesday and the British pound rallied on bets that Europe's and Britain's central banks are preparing to scale back economic stimulus, while bank stocks led a rebound on Wall Street. The dollar index slid as Bank of England Governor Mark Carney said a debate on the need to raise interest rates is due "in the coming months," adding to a hawkish tone out of the European Central Bank on Tuesday. Carney's remarks convinced traders that European monetary policy was shifting in a more hawkish direction, analysts said. The monetary policy comments out of Europe and Britain come as the U.S. Senate delayed a healthcare legislation vote, a move seen as pushing back the timeline for other items of President Donald Trump's agenda including a tax overhaul regarded as essential to support lofty stock valuations on Wall Street. R

CBs - Global borrowing hits record as big central banks prepare to tighten credit  

Global debt levels have climbed $500 billion in the past year to a record $217 trillion, a new study shows, just as major central banks prepare to end years of super-cheap credit policies. World markets were jarred this week by a chorus of central bankers warning about overpriced assets, excessive consumer borrowing and the need to begin the process of normalizing world interest rates from the extraordinarily low levels introduced to offset the fallout of the 2009 credit crash. 

This week, U.S. Federal Reserve chief Janet Yellen has warned of expensive asset price valuations, Bank of England Governor Mark Carney has tightened controls on bank credit and European Central Bank head Mario Draghi has opened the door to cutting back stimulus, possibly as soon as September. Global debt, as a result, now amounts to 327 percent of the world's annual economic output, the Institute of International Finance (IIF) said in a report late on Tuesday. R 

  MANUFACTURING Top   

3DP - Brooklyn start-up mass produces 3-D printed parts with robots

A Brooklyn start-up named Voodoo Manufacturing is capable of creating any image or design via 3-D printing, CNBC reported last week. The company is almost wholly staffed by robots.  The Voodoo factory relies on 160 3-D printers, with robots assembled from sensors, arms, grippers and other components, running the process of changing the printing plates then restarting the printers.

Not only is Voodoo Manufacturing a prototype for disruption of small parts manufacturing, but it's also an early adopter of robotic task management, fulfilling recent predictions that Voodoo and its ilk are poised to overtake the production industry. Thanks to their ability to produce small and limited-batch pieces, 3-D printing studios could easily provide fulfillment for orders where parts manufacturers were either unavailable or too expensive.  Supply chain Dive

Cybersecurity - The global ransomware epidemic is just getting started

GoldenEye, a new strain of the Petya ransomware, took the world by storm on Tuesday after starting with a cyberattack in Ukraine. The NSA's EternalBlue exploit, which took advantage of a Windows PC's ability to quickly spread files across a network, is the ammunition that powers both WannaCry and GoldenEye. The mix of the NSA's hacking tools with normal malware has created a toxic combination, especially since you can essentially go shopping for malware. GoldenEye is a variant of Petya, which was sold on forums on the dark web since last April as a ransomware service: The buyers get 85 percent of the profit, while the malware's creators reap 15 percent.

WannaCry was supposed to be a wake-up call for people to update their computers with the latest software. But it appears people just forgot about the attack and went on with their lives. Avast, an antivirus company, found that 38 million PCs scanned just last week still have not patched their systems. That's after Microsoft released special patches so that outdated computers running on Windows XP and earlier versions could be protected from the NSA exploits. Considering that not everybody uses Avast, Jakub Kroustek, Avast's threat lab lead, inferred that the "actual number of vulnerable PCs is probably much higher." cnet

Cybersecurity - New computer virus spreads from Ukraine to disrupt world business

A new cyber virus spread from Ukraine to wreak havoc around the globe on Wednesday, crippling thousands of computers, disrupting ports from Mumbai to Los Angeles and halting production at a chocolate factory in Australia. Danish shipping giant A.P. Moller-Maersk said it was struggling to process orders and shift cargoes, congesting some of the 76 ports around the world run. FedEx said its TNT Express division had been significantly affected by the virus, which also wormed its way into South America, affecting ports in Argentina operated by China's Cofco. Russia's Rosneft, one of the world's biggest crude producers by volume, said on Tuesday its systems had suffered "serious consequences" but oil production had not been affected because it switched to backup systems.

Ukraine, the epicenter of the cyber strike, has repeatedly accused Russia of orchestrating attacks on its computer systems and critical power infrastructure since its powerful neighbor annexed the Black Sea peninsula of Crimea in 2014. R

Cybersecurity - The Petya ransomware is starting to look like a cyberattack in disguise

The haze of yesterday’s massive ransomware attack is clearing, and Ukraine has already emerged as the epicenter of the damage. Kaspersky Labs reports that as many as 60 percent of the systems infected by the Petya ransomware were located within Ukraine, far more than anywhere else. The hack’s reach touched some of the country’s most crucial infrastructure including its central bank, airport, metro transport, and even the Chernobyl power plant, which was forced to move radiation-sensing systems to manual.

There’s already mounting evidence that Petya’s focus on Ukraine was deliberate. In each case, the infections seem to specifically target Ukraine’s most vital institutions, rather than making a broader attempt to find lucrative ransomware targets. These initial infections are particularly telling because they were directly chosen by whoever set the malware in motion. Computer viruses often spread farther than their creators intended, but once Petya was on the loose, the attackers would have had no control over how far it reached. But the attackers had complete control over where they planted Petya initially, and they chose to plant it by some of the most central institutions in Ukraine.

The broader political context makes Russia a viable suspect. Ukraine’s power grid came under cyberattack in December 2015, an attack many interpreted as part of a hybrid attack by Russia against the country’s infrastructure. The Verge

Cybersecurity - Ransomware Attack Raises Concerns Over Future Assaults

The worldwide cyberattack, which began and was most prevalent in Ukraine, has raised concerns that similar attempts will become more widespread as hackers mimic the techniques in future digital assaults. More than 12,500 machines in Ukrain were targeted, though the online attack quickly spread to 64 other countries. Businesses in Ukraine, Russia and Poland, Italy and Germany, were most affected. Reports from Asia suggested that many of the companies hit were the local arms of European and American companies that were struck on Tuesday.

Brian Lord, former deputy director for intelligence and cyberoperations at Britain’s Government Communications Headquarters, the country’s equivalent to the N.S.A., said the attackers had made it overly complicated for individuals to pay the potential ransom. He said that, rather than aiming for financial rewards, the hackers were trying to create the largest amount of disruption — particularly in Ukraine, where the attack began.  NYT

Cybersecurity - Cyberattacks targeted US nuclear sites this year, report says

United States officials are investigating multiple cyberattacks that unsuccessfully targeted nuclear generation sites sometime this year, E&E News reports. The event has been code named "Nuclear 17." News of nuclear cyberattack attempts in the U.S. broke as a wave of ransomware attacks was spreading across parts of Europe, similar to the WannaCry virus that surfaced in May.

Cybersecurity has become a major priority of the electric utility industry. Last month, cybersecurity firm Dragos issued a report concluding malware that was used in a 2015 cyberattack resulting in power outages in Ukraine could be modified by developers to target the United States. Lloyd's of London in 2015 issued a report aimed at informing the insurance industry as to the potential impacts of a widespread attack on the U.S. power grid, and concluded the total economic loss could range from $243 billion up to $1 trillion in the most damaging scenarios.   Utility Dive

  TECH Top   

Mobile Economy - Global app market to reach $6.3 trillion by 2021

The global mobile app economy was worth $1.3 trillion last year and is poised to skyrocket to $6.3 trillion by 2021 as users spend more money on apps, in-app purchases, and mobile commerce. According to a study by analyst firm App Annie, consumer spending across all mobile app stores will reach $139 billion over the next four years. Apple's App Store will remain the largest contributor regarding app store purchases, growing to over $60 billion in 2021. In-app advertising will also witness a sharp growth to $201 billion.

Mobile commerce, like the purchasing of goods via a smartphone app, represents the “single largest driver of the growth of the mobile and app economy,” said App Annie. Much of the spike would come from China and the US, followed by Japan, the UK, and India. Asia will be the fastest-growing app economy reaching $3.2 trillion. RT

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  COMMODITIES Top   

Coal - India Has Shut Down 37 of the World’s Biggest Coal Company’s Mines

The largest coal company in the world has announced that it will be shutting down 37 of its sites. The company, Coal India, produces 82 percent of India’s coal, and the closings account for nine percent of Coal India’s sites. The move is fueled by the increasing affordability of solar power: prices continue to plummet as technology and government incentives work to make renewable energy more attractive.

India is targeting 57% of electricity to be generated by renewables in 2027 along with pledging that every car sold in the nation will be electric by 2030. Looking ahead to 2050, the nation hopes to be coal-free. Dramatically increased population is going to add to the country’s energy needs and we need to be prepared to meet it with clean energy from renewable sources.  Futurism

Coal - Coal On The Rise In China, US, India After Major 2016 Drop

Coal mining increased in May by at least 121 million tons. The US saw a 19 percent jump in the first five months of the year. The U.S., China and India combined produce about two-thirds of the coal mined worldwide, and the latter two nations also import coal to meet demand. India's production expanded even during coal's global downturn.

Coal had apparently reached a bottom when tonnage worldwide had decreased 6.5 percent in 2016, but this drop has not been sustained. The reasons for this year's turnaround include policy shifts in China, changes in U.S. energy markets and India's continued push to provide electricity to more of its poor, industry experts said.

Even as coal marches forward, China now has more renewable energy than any other nation and India has cancelled 13.7 gigawatts in proposed plants. Even with President Trump’s plans of reviving the coal industry, cheap natural gas, a growing appetite for renewable energy, and stricter pollution rules combined with utilities investing in alternatives will likely still move the US forward toward renewable energies.  MNet

Gasoline - Cheapest Fuel Since 2005 Brings U.S. Drivers ‘Christmas in July’

Gas prices have plunged to their lowest levels since 2005 at an average of $2.21 per gallon. Over the last decade, the national average has been as much as $1.04 a gallon higher during the summer holiday compared with the beginning of the year. The average Independence Day price is 47 cents higher.

The spread between the nation’s lowest and highest priced gas stations stood at $1.29 a gallon on Wednesday, compared with the 10-year average of 98 cents a gallon for this time of year. SUV drivers can save on average $11 per fill-up by stopping at the favorable end of the price spread. Smaller cars can save $6.

44.2 million Americans are expected to travel at least 50 miles away from home over July 4th weekend. Air travel is projected to rise 4.6% over the same period. With cheaper domestic tickets compared to 2016, 3.44 million people are expected to fly. B

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  ENERGY & ENVIRONMENT Top   

Lithium Batteries - China Is About to Bury Elon Musk in Batteries

Chinese companies are planning to outpace Tesla Inc. in the lithium-ion battery race. China hopes to produce more than 120 gigawatt hours per year by 2021, “enough to supply batteries for around 1.5 million Tesla Model S vehicles or 13.7 million Toyota Prius Plug-in Hybrids per year.

While still impressive, Tesla Inc.’s factory is projected to produce a fraction of that at 35 gigawatt-hours of battery cells annually. Tesla also plans to produce nearly 84,000 vehicles in 2016 and 500,000 in 2018.

China’s battery investment is also driven by the automobile industry as they are determined to become the global leader in clean cars. Whereas Tesla is one mega-producer, China’s lithium-ion battery market is made up of dozens of smaller players. Roughly 55 percent of global lithium-ion battery production is already based in China, compared with 10 percent in the U.S. By 2021, China’s share is forecast to grow to 65 percent. B 

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Nuclear - Korea power stocks drop as Moon halts nuclear plants

South Korean nuclear shares experienced a steep drop as a result of their new government’s anti-nuclear policy which saw the cancellation of two new plants.

President Moon, who has introduced plans to have the country be reactor-free by 2060, mentioned that the government may still move forward with the construction, but they will consult the views of the public first. Some speculate that this move could undermine the countries ambitions on the global stage as the global atomic energy market is expected to generate $740 billion in sales over the next decade.

South Korea has the sixth-largest fleet of nuclear reactors in the world, generating about one-third of its energy needs from 25 reactors. If the government goes forward with scrapping the construction of the planned reactors, it could lead to costs of about $2.3 billion. The country’s first nuclear reactor, built in 1977, was shut down just last week as a part of the initiative. FT

Renewables - 'Bring on more renewables,' U.S. regulator says as grid study looms

Outgoing federal regulator Colette Honorable maintains that wind and solar power do not make the US electricity grid less stable. While she admits that renewables have different attributes than base load power, which includes coal and nuclear energy, those difference need to be overcome.

American renewables have made clear progress as February saw wind power more than 50 percent of electricity demands in the 14 state Southwest Power Pool. In March, wind and solar accounted for more than 10 percent of U.S. electricity generation for the first time. The Energy Department is expected to release the grid study in July. It will take a critical look at the role that renewable energy policies have played in the closure of coal and nuclear electricity plants and see if the loss of those facilities has reduced the grid's stability.  R

Renewables - Solar Costs Are Hitting Jaw-Dropping Lows in Every Region of the World

The decline in solar costs will continue with an expected 27 percent drop in average global project prices by 2022, about 4.4 percent each year. Reductions in inverters, trackers, and labor costs will lead the way in cutting costs. India is seeing the lowest system prices of any major solar market in the world with a utility PV system pricing of 65 cents per watt. Consumers must beware however, the race to the lowest price can have a dampening effect on quality.

In America, all eyes are on The Section 201 trade complaint from Suniva and SolarWorld which could determine the future of solar pricing models for the nation; “Although the result of the case won't be known until much later in the year, the filing suggests a possible penalty on all imported silicon PV modules of $0.78 per watt -- $0.41 cents higher than current U.S. module pricing. Suniva advises that the floor price step down to $0.72, $0.69 and $0.68 per watt in years two, three and four, respectively. It is also asking for a minimum price of $0.40 per watt on imported cells.”  GTM 

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Renewables - UPS commits to 25 percent renewable energy-sourced power by 2025

UPS is enacting plans to make its freight-carrying fleet much more eco-friendly. The company says 25 percent of the electricity it consumes will come from renewable energy sources by 2025. Currently, just 0.2 percent of UPS’ electricity comes from renewable energy.

By 2020, one in four new vehicles it purchases annually will be an alternative fuel, electric, or self-driving vehicle, up from 16 percent in 2016. 40% of all ground fuel will be from sources other than conventional gasoline and diesel by 2025, an increase from 19.6 percent in 2016. On top of all of this, late last year, UPS confirmed plans for a $400 million logistics campus near Charlie Brown Airport. UPS operates more than 8,300 alternative fuel and advanced technology vehicles worldwide  Bizjournals

  ENDNOTE Top   

This illuminating chart shows the Fed’s $4.5 trillion balance sheet isn’t all that massive   BI

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