Denial on The Nile

Wed, 2011/03/02 - 12:07pm | Your editor



John Thomas, my pseudonymous former colleague on The Economist, AKA The Mad Hedge Fund Trader, is becoming a cheerleader for the proliferating of exchange traded funds. He writes:

The current near monopoly enjoyed by the top three ETF issuers, Black Rock, State Street, and Vanguard, control 83% of the market. At last count more than 1,100 ETF’s were capitalized at more than $1 trillion. The result has been grasping management fees, exorbitant expense ratios, and poor structural designs which create massive tracking error.

The good news is that new entrants are flooding into the ETF space, and the heightened competition will help curtail the worst of these abuses. This development will accelerate the demise of the bloated and arthritic mutual fund industry. Not only will management fees and expense ratios plunge, there will be a far broader range of offerings, as new funds are launched from a diverse range of institutions coming from differing areas of expertise. Failure to enter the newly lucrative ETF market by the remaining giants sitting on the sidelines means that their existing mutual fund businesses will be cannibalized.

Look no further than bond giant PIMCO, coming out with a plethora of fixed income related funds, Van Eck’s expanding list of ETF’s for commodities, and the even growing list of inverse and leveraged inverse ETF’s presented by ProShares.


“Not so fast, John.” Consider EGPT, the ETF investing in the stocks of Cairo and Alexandria, creating by the Van Eck group whose commodity expertise you cited. With the bourses of Egypt shut by the Tahrir Revolution (the reopening has been further delayed until Mar. 6), the ETF pricing is in limbo. With no market trading for all but a handful of Egyptian shares with Global Depositary Receipts (amounting to at most a quarter of Egyptian market capitalization mostly from the Oraascom group of  Naguib Sawiris), ETFs cannot track an Egyptian index. The prospectus-designated role for institutional investors, creating and destroying ETFs by trading the underlying shares, has been suspended. The reason: underlying Egyptian shares will have not traded for 24 days if the Markets only reopen next Sunday as scheduled. And Egyptians who own shares are demonstrating (they do that) to stop the opening because they fear a market drop.

So Van Eck Market Vectors Egypt Index is trading at a 10% premium over the net asset value and the fund could plunge when the Egyptian stock market finally reopens, accordign to Aaron Pressman of Reuters. Actually the EGPT ETF is being priced by the market as if it were a closed-end fund, since new shares cannot be created or destroyed. The only ETF shares trading are those from before the bourses of Egypt closed. They are being priced by supply and demand like a CEF.

Pressman only is guessing at the premium to the stale net asset value. When the market reopens NAV can fall further. Van Eck can cite force majeur but it hardly will enhance market confidence in the newbie ETF creators among investors.

Full disclosure: your editor owns shares of State Street.

More for paid subscribers follows from Brazil, China, Belgium, Thailand, Britain, South Africa, and a few other places.

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Tue, 2011/03/01 - 7:32pm | Your editor

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Japan Myths and India Committees

Tue, 2011/03/01 - 12:04pm | Your editor

In the latest edition of The Atlantic, Eamonn Fingleton writes a quiz from Tokyo:


Let me try some questions that will probably prove perplexing. They concern the Japanese economy, that erstwhile juggernaut of world trade of the late 1980s, which, we are told, has been mired in stagnation ever since.

Question 1: Given that Japan's current account surplus (the widest and most meaningful measure of its trade) totaled $36 bn in 1990, what was it in 2010: (a) $18 bn; (b) $41 bn; or (c) $194 bn?

Question 2: How has the yen fared on balance against the dollar in the 20 years up to 2010: (a) fallen 11%; (b) risen 24%; (c)risen 65%?

The answer in each case is (c). Yes, all talk about "stagnation" and "malaise" to the contrary, Japan's surplus is up more than 5-fold since 1990. And, yes, far from falling against the dollar, the Japanese yen has actually boasted the strongest rise of any major currency in the last two decades.

How can such facts be reconciled with the "two lost decades" story? I don't think they can. There is clearly a contradiction here, and after studying the facts on the ground in Tokyo for decades I find it hard to avoid the conclusion that the story of Japan's stagnation is a media myth.

Certainly anyone who visits Japan is struck by the obvious affluence even among average citizens. The cars on the roads are generally much larger and better equipped than in the 1980s (indeed state of the art navigation devices are more or less standard on many models). Overseas vacation travel has more than doubled since the 1980s. The Japanese boast the world's most advanced cell phones, and the biggest and best high-definition television screens. Japan's already long life expectancy has increased by nearly two years. Its Internet connections are some of the world's fastest --ten times faster on average than American speeds.

True, not all of Japan's indicators are equally impressive. The Tokyo stock market has never recovered from its 1990s slump. Neither has the real estate market. (In the latter case, however, there is a silver
lining in a major boost to living standards, in that young home buyers now get far more space for their money. In any case the implosion since 1991 merely restored some sanity to valuations that had previously become -- temporarily -- outlandish).

On the negative side, there is the fact that Japan's economic growth rate, as least as calculated officially, has averaged little more than 1% a year in the last two decades. For those who propound the "stagnation" story, this is their strongest card. But it does not accord with the common observation -- undeniable to those who have known the country since the 1980s -- that the Japanese people have enjoyed one of the biggest improvements in living standards of any major First World nation in the interim.

If we believe the evidence of our eyes, we must look again at those economic growth figures. Preposterous though it may seem to an unacclimatized Western observer, it appears that Japanese officials have been deliberately understating the nation's growth. But why would they do such a thing? A clue lies in trade policy. The fact is that, constantly since the 1870s (with the exception of a brief interlude in the late 1930s and early 1940s), Japan's pre-eminent policy objective has been to keep ramping up exports. That policy came very close to derailment in the late 1980s as a groundswell of opposition built up in the West. By the early 1990s, however, the opposition had largely evaporated as news of the crash led Western policymakers to pity rather than fear the "humbled juggernaut." It is a short jump from this to the conclusion that Japanese officials have decided to put a negative spin on much of the economic news ever since.

From India, more from Mohamad Habib Khan on the big gap in the new New Delhi budget:

Divestiture is needed to make public sector undertakings more competitive, to reduce excess political influence on their operations, to generate funds for expansion, and to provide much needed cash to the government the economy. Privatizations in FY10 and FY11 produced over $ 10.11 bn for the government.

But there is another reason why divestments are needed. 2010 was the year of multiple corruption scandals in India: the Adarsh Housing Society, the 2G Telephone Spectrum auction, the IPL scam, the LIC Housing Finance scandal, the Citibank scam. Even the Commonwealth Games construction program was deeply tainted with corruption.

A country facing challenges like maintaining fiscal prudence and attaining targeted growth is being racked by corruption which cost India multiple billions of dollars, A figure of $38.67 bn was lost by the corrupt 2G telephone auction alone.

Now, in the 2011-2 budget the government announced an ambitious target: raising $20.87 bn from disinvestitures over the next 3 yrs starting strongly with $8.79 bn in the current 2011-12 FY, Follow-up Public Offers for Steel Authority of India Ltd and Oil & Natural Gas Co,, originally schedule for the prior FY, are now scheduled for FY 2011-12. IOC, Power Finance Corp., Hindustan Copper, and Rashtriya Ispat Nigam Ltd. are also scheduled for disinvestment. Soon.

While the new budget was expected to include stringent measures and firmly laid-out plan to contain large scale corruption as companies are privatized, Finance Minister of Finance Pranab Mukherjee merely announced the creation of a committee, a group of ministers, to consider measures for tackling the rot.


You can expect more Colombian ADRs on Wall Street as the country moves into privatization mode for banks and utilities. Banco Davivenda may be next in line.


More for paid subscribers follows from Britain, Colombia, Brazil, Israel, and of course Canada:

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Why We Have Taxes

Mon, 2011/02/28 - 12:26pm | Your editor



I know I am not going to make myself many friends with this thought, but I think it needs saying:

“Taxes are what we pay for civilized society.” The quotation is from Oliver Wendel Holmes jr in the Compañia General de Tabacos de Filipinas vs Collector of Internal Revenue, in 1927.

Of course we don't like paying taxes, but we want to defend our borders, protect ourselves from crime and fire, educate our children, and fulfil our social responsibility to the old, the poor, the halt, and the lame.

From India, Mohamad Habib Khan writes:


Amid high concern over India’s fiscal deficit, Pranab Mukherjee, Minister of Finance, released the budget for FY 2011-12 in Parliament. Economists, investors (including foreign ones), opposition parties, corporations, and other concerned parties fixed their eyes on increased spending on key sectors, subsidies, and social welfare program. High oil prices were expected to strain the fiscal situation.

However, Finance Minister announced a decline in fiscal deficit from 5.5% to 5.1% of GDP for the FY 2010-11. an significant drop from the 6.5% of GDP in FY 2009-10. For 2011-12, the fiscal deficit will be kept at 4.6% of GDP, an improvement from the target 4.8% presented in the last Budget.

The Government succeeeded in fiscal consolidation in 2010-11 thanks to higher non-tax revenue receipts from the 3G and Broadband Wireless Access auctions which were a key factor helping the Government perform ahead of target. These receipts of around INR500 bn were available for infrastructure and social sectors spending and to cover subsidies.

Faster adjustments will help the Government in unlocking more resource from the Government revenues in the future and use them for various developmental programs.

Colombia surprised the markets with a 0.25% jump in its discount rate at which the central bank lends overnight. The most recent Bloomberg survey showed 21 out of 23 economists predicting no rate rise. The new 3.25% rate was slapped on because of inflation fed by higher food prices, the result of a catastrophic flooding. Today Colombian peso bond prices fell which means the market, having predicted wrong, now excpects the tightening work in keeping inflation in check.

There will be no blog this coming Friday as my new office furniture is being built in. It is tax deductible from my company's profits and will also put a bunch of Greek-American carpenters and a Filipino-Italian-American designer to work.

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A Zombie Stock Pick

Fri, 2011/02/25 - 1:10pm | Your editor


Here is a note from Garrett:

I subscribe to Vivian's investment model via and wanted to ask how her investment strategy addresses potential future market downswings. 

Many people are starting to cry "bubble" and crash by end of 2011. I know Vivian's strategies are primarily long based, so I wanted to understand how she addresses downswings in the market. Other managers may have shorting strategy flexibility or hedging plays. Considering the market never goes up forever, how does her strategy play in this volatile market with potential future downward trends?

Here is my reply which I am making public under SEC rules.

Firstly, I am far from convinced that the US market is in a bubble now. Wall Street price levels currently are sustained by very good earnings reports from major companies.

Secondly, we do not invest in the US market. We are invested outside the USA where in general the price/earnings ratios are lower. And the account Garrett is asking about specifically aims at companies paying high dividends. If good metrics are the belt holding up our portfolio, then good dividends are the suspenders giving us another level of support.

Moreover in Europe and Japan, manufacturers and consumers are better able to cope with higher oil prices, thanks to different geography and their experience with high gasoline taxes.

And even in the USA the forecasts are that the impact of triple digit prices for a barrel of oil will be lower than in 2007.

Moreover, there are reports that Saudi Arabia can simply open its spigots to replace oil not being exported by Libya.

What we have seen so far in 2011 is a massive move away from non-U.S. Equities by American fund investors. In one week alone $3.32 bn has been redeemed according to mutual fund flow-tracker EPFR Global. The money has headed home to US mutual funds according to the Cambridge, MA based service. Low interest rates have also led people to tap their money market accounts for more placements in US shares.

This is in part a panic reaction to the upheavals in the Middle East and North Africa. We are invested in high-yield oil search and production stocks from outside the US in the account.

To protect against the flows to the USA producing a stronger US$, which hurts non-dollar holdings, we recommend an exchange-traded fund benefitting from US dollar strength as part of our global investing portfolio. We also are heavily invested in Canada whose high-yield stocks are producing even higher yields for US-based investors as the loony rises with the price of oil and raw materials.

After the “flash crash” of last year, I do not recommend shorting or hedges which can be triggered by aberrant market downswings, with the same awful impact on your portfolio as was produced by so-called stop-losses.

For whatever it is worth, chartists are now saying that Wall Street is suffering from the downside exhaustion of its bears. This was shown by the recovery yesterday (Feb. 24) of the S&P 500 from a new low.

More for paid suscribers follows with good news from Switzerland, Brazil, and Germany, and other reports from Brazil, Britain, Vietnam, and Korea. And a new and astonishing stock pick from our man in Vancouver, Martin Ferera.

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Markets are from Mars

Thu, 2011/02/24 - 1:24pm | Your editor


Based on the close of trading on Feb. 22, the 10-yr-old global Dow Jones Islamic Market Titans 100 Index, DJIM, which measures the performance of 100 of the leading Shari’ah-compliant stocks globally, gained 1.40% month-to-dat. About $5 bn in investments tracks the index which covers companies meeting Islamic rules against charging interest, and against investing in producers of alcohol or pork products. While the Shar'ia index has done well lately, this month it failed to match the Dow Jones Global Titans 50 Index, tracing the 50 biggest companies worldwide, which posted a gain of 1.82% from Feb. 1-22. Gerard Al-Fil of Dow Jones commented:

 “It is no surprise that the DJIM covering Arab stock markets suffered the largest losses in February. Political crisis and civil unrest in Egypt, Jordan, Bahrain, Yemen, Morocco, escalating even to a civil war in Libya, weighed on markets. The turmoil led the DJIM Kuwait Index to drop 8.64%. The DJIM Gulf Co-operation Council Index finished down 5.03% and the DJ Dubai Financial Market Titans 10 Index lost 4.83%. These declines stand in stark contrast to the rise in energy prices, which usually lift Middle Eastern markets.

“Meanwhile, analysts and bankers debate whether current trading levels mean buying opportunities. “'Valuations at Gulf Arab markets are cheap, but international investors nowadays avoid the region,' says Gary Dugan, Chief Investment Officer & Acting General Manager, Private Banking, at Dubai-based Emirates NBD, the Middle East’s largest bank by assets. 'Based on this, we advise our clients to be cautious during the next three to five months.'” (Reprinted with permission.)


BBR, a NYC boutique fund manager, sent out this note: “TSE and LSE announce strategic agreement”. The explanation followed:

“Tehran Stock Exchange (TSE) and Lahore Stock Exchange (LSE) have signed a Memorandum of Understanding (MoU) to strengthen and widen mutual understanding and cooperation between them. The MoU especially aims at strengthen understanding and cooperation in the areas of technology, launching new products, reporting and information dissemination procedures, market making, exchange of information and/or experts, preparing environment for participating two markets brokers in each other markets.It also intends to spread awareness of the legal infrastructure available in both markets, as well as investment opportunities. TSE said the MoU will ensure a periodic exchange of information between TSE and LSE and encourage collaboration between brokers in both markets. The MoU will serve as a basis for performing mutual training courses for both exchanges' experts and other market participants.” This is what passes for a joke in the world of stock marketry.

Peru decided to cut back on the amount its pension plans can invest outside the country, to 30%. Earlier reforms had raised the level to 50% for AFP investment. If too much stock investment stays within Peru there is risk of a bubble given its narrow market.

Today's issue is late because your editor had to deal with phone calls from Andrew in Canada and Nishant in India, interrupting my writing. Andrew will be the new webmaster, which we all are looking forward to once Ron completes the handover, which he is now delaying to attend a conference.

More for paid subscribers from India, Singapore, Thailand, Peru, Canada, Switzerland, Israel, Brazil, Finland, and France follow. Please join our subscription rolls to benefit from the full panoply of our services, which include telling you which stocks to buy globally.

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Governments are from Venus

Wed, 2011/02/23 - 12:20pm | Your editor


Martin Ferera writes from Vancouver, Canada:

I sometimes wonder which planet our (western) politicians think they live on, perhaps Venus.

First it's the US Congress fighting against the extension of the Keystone pipeline from Alberta.

Now come news stories that the EU may hold up free trade negotiations with Canada because of a dispute over the "dirty" oilsands.

Presumably these politicians prefer to buy "clean" oil from Libya or the Kingdom of Saudi Arabia or Iran!

Martin was reacting to an article in The Globe and Mail (Toronto) which read:

“Canada has threatened to scrap a trade deal with the European Union if the EU persists with plans that would block imports of Canada’s highly polluting oil sands, according to EU documents and sources.

“The EU has told its fuel suppliers to reduce the carbon footprint of fuels by 6% over the next decade, and is now fine-tuning “default values” to help suppliers identify the most carbon-intensive imports.

“Canada says the standards would instantly constrict a possible future market for its oil sands.

“'Canada has been lobbying the Commission and member states intensively to avoid a separate default value for fuel derived from tar sands,'” said a briefing note prepared for EU climate commissioner Connie Hedegaard. 'It has raised the issue in the context of EU-Canada negotiations on a Free Trade Agreement,' adds the note, one of several from last year released last week under freedom-of-information laws.”

Your editor notes that the flag of King Idriss, the pre-Qaddafi Libyan monarch, is flying in Benghazi again. Libyans are traditionalists. When the British Army under Gen. Montgomery moved into Benghazi to fight Rommel during World War II, it called for workers to build roads from the port into the hinterland. Many young oasis Libyan men moved to the city to do the work. But before they left the south they arranged for the marriage of their sisters and sweethearts to old village men. When the road work was completed, they went back to the oases, and the old men divorced their young wives, who then became the brides of the newly enriched young village men.

Oil companies with serious production in Libya are down, notably Tatneft for which it also was an entryway to the Arab world. Tatneft is from Tartarstan and its ADR has been delisted, but we used to own it when it traded as TNT. It now trades only in London.

Guenther Grass, for his own reasons, wrote a play against Berthold Brecht's allegedly pro-regime reaction to the 1953 East Berlin Uprising. Brecht's poem about the event resonates for the Great Socialist People's Libyan Arab Jamahariya:


The Secretary of the Writers Union
Had leaflets distributed in the Stalinallee
Stating that the people
Had thrown away the confidence of the government
And could win it back only
By redoubled efforts.


Would it not be easier
For the government
To dissolve the people
And elect another?


More for paid subscribers follows from Canada, Singapore, Israel, Britain, Switzerland, and Germany.

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Trading alert

Tue, 2011/02/22 - 12:56pm | Your editor

Another share sale today.

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Tue, 2011/02/22 - 12:53pm | Your editor


Libya is the first country with a sovereign wealth fund whose government faces overthrow. The country, with a population of about 7 mn, is a major oil producer. The Libyan Investment Authority has about $75 bn under management, mostly still in cash. But its aim was clearly to make connections with holders of power.

Some of Libyan placements are known, including a 3% stake in Pearson's education sub, an arm of the group which also publishes The Financial Times. The fund also has a convoluted holding in the Italian bank UniCredito of 2.5%, alongside a direct stake by the Libyan central bank of another 4.9%. This has already resulted in a shareholder rebellion against the CEO at the bank, Alessandro Profumo, who resigned.

Italy was the colonial era master of Libya and there are strong connections. One of Muamar Khaddafi's sons played football for Perugia in Italy and the sovereign wealth fund now owns 7.5% of Juventus, a football team controlled by the Agnelli family which controls Fiat. Libya's wealth fund also owns real estate in Italy and posh Mayfair in London.

However, the US seems to have avoided the bullet. Although the powerful Carlyle Group has sought mandates from Libya, it appears not to have landed any deals, despite ex-Chairman Frank Carlucci courting the heir apparent, Seif al-Islam Quaddafi.

China may bring the first Facebook to market before the US one has its IPO. Renren (which means everybody) is reported going to be listed here and raise $500 mn by underwriters headed by Deutsche Bank. Japan's Softbank owns 40% of the company which controls Renren. However, there are no reliable corporate accounts for the Chinese stock yet, and the Facebook clone, like all Chinese Internet entities, is censored.

The team of my eldest grandson has just won an ice-hockey tournament in Ohio. Claude is the 4th generation skater in my family, starting with my German-born mother, but he is the first to wield a stick and hit a puck. My youngest grandson, who just turned three, meanwhile has learned how to hit the redial botton on the telephone. My Presidents' Day peace was regularly shattered by telephone calls from Jules who played music or yelled “Knock, knock.” When I replied “who's there?” he said “more presents.” Actually he will have to wait another year.

I was not selected for a jury panel and now can relax for 5 more years. However, this week may be discombobulated by my office being redecorated and refurnished.


Morgan Stanley Smith Barney's Global Investing Committee today broke ranks with most observers and again tipped emerging markets and the commodity producers Canada and Australia. There has been heavy movement this year out of the developing countries which gained momentum as the Arab world went revolutionary. MS writes: we continue to overweight emerging markets (EM) and commodity-sensitive Australian and Canadian markets. Recent underperformance of EM equities is, we believe, an interim bull-cycle correction rather than a cyclical bear market.”


More for paid subscribers from Singapore, Israel, Britain, China, Sweden, South Africa, Finland, Norway, Canada, and for the first time, two notes from our new reporter Habib Khan, about India, where he is based. And a trading alert. Company news and trading alerts are only for paid subscribers.

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Inflation, Revolution and Investing

Fri, 2011/02/18 - 12:44pm | Your editor

(From Frida again today, filling in while Vivian serves on a jury, if selected)

Rumbles, rumors and riots about a comeback of pernicious inflation are making their way across the globe. Not very long ago, the experts warned that deflation was the great danger. That fear has subsided, replaced by its evil twin: concern about a spiraling of price pressures that demolishes everything in its path. The question is whether the fear is well founded and how investors should respond.

No one should rush to dismiss the threat. There is no question that commodity prices have been on a steep climb. Food prices, in particular, have reached catastrophic levels for the poor. The UN’s Food and Agriculture Organization says its Food Price Index has risen to its highest level ever, climbing for the past seven months.

Food inflation played a major role in propelling the ongoing Arab revolution. The role of Facebook and Twitter received more attention, but the economic squeeze helped create the environment and stoke the flames of anger. Egypt, for example, imports most of the food it eats. With nearly half the population living on $2/day, higher prices mean hunger for millions. While Americans, by contrast, spend less than 10% of their income on food, Egyptians spend about 40% of their monthly earnings on food. That’s one of the highest ratios in the world.

Commodity prices have climbed for many reasons, including natural disasters in agricultural lands, such as floods in places like Australia and Pakistan, and drought and fires in Russia. America’s use of corn for ethanol also pushes up demand and prices without producing more food. Then there are the cheap money policies of Western monetary authorities.  Fed Chairman Ben Bernanke even defended himself from charges that his policies helped caused the Egyptian uprising. Quantitative Easing fueled a wave of speculation that pushed up prices.

Then there is the inflationary pressure brought by millions of new shoppers entering the middle class in countries like China, India and Brazil. Their growing purchasing power is making life more difficult for the poor everywhere.

In the developed world the situation is quite different. Rising food prices indeed squeeze the poor in rich countries, but for the overall economy, food prices makes up a much smaller share of consumption.

But food costs are not the only problem. Oil prices have also been climbing, as have other commodities. And core inflation is also picking up.

Wednesday’s U.S. inflation report showed the biggest jump in two years for wholesale prices excluding food and energy. That, however, is not unexpected in an economic recovery.

U.S. and European economies still have quite a bit of slack from the recession, so in the short to medium term there is no great risk of core inflation spiraling out of control. And yet, companies are facing higher costs for the raw materials they buy, which could compress profit margins.

For an investor, this creates risks and opportunities. Moderate inflation can allow companies to raise their prices and widen their profit margins, as long as they can raise prices faster than their costs increase.

That’s what legendary investor Warren Buffett says is the key to smart stock picking. Buffett testified before the Financial Crisis Inquiry Commission because he owns a chunk of Moody’s, the bond rating company blamed by some for credit grade inflation during the real estate boom.

Buffett says he liked Moody’s because it has “pricing power.”  If you have pricing power, he said, you can raise prices without losing business. That, he said, “is the single most important decision in evaluating a business.” That’s especially true in time of inflation.

In developing countries, inflation numbers can be subject to political manipulation, as they have been in Argentina. And inflation can squeeze consumption, hurting the economy.

That adds to negative sentiment towards emerging markets. EPFR says its Developed Markets Equity Funds are posting big inflow gains, while Emerging Market equity finds are experiencing billions in redemptions.

Now news for paying subscribers from Europe, Asia, the Middle East and North America.

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