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Reply From Pettis on Spain; Prisoner’s Dilemma in Reverse; EMU End Game

Courtesy of Mish.

In response to Spain Needs to Debate Leaving the Euro; Tooth Fairy Economics I received a nice email from Michael Pettis confirming my translation was correct. He also attached the original article in English.

Michael Writes …

Thank's Mish.

I am attaching the original, but the translations you got were basically right and covered the main points, which you understand anyway.

  1. Excessive debt impedes growth, and very few sovereign debt crises in history have been resolved by growth
  2. The only other way to "resolve" a debt crisis is to assign the losses to one group or another
  3. It is usually workers through unemployment and middle class savers through hidden or explicit taxes who end up paying
  4. It may or may not be worthwhile to save the banks at the expense of the middle and working classes, but at the very least we should discuss it openly and make sure that this is what we have really decided is in the best interests of the country.

Michael

Original Text in English

Spanish Government Debt is not Sustainable

Within four years of the 1837 crisis, before it was truly a united country under a central government, two-thirds of American states, including several of the richest, defaulted on their foreign debt. The US survived. If the European Union is to survive, European debt must be resolved. The longer we wait, the more likely a permanent breakup of the euro and the European Union.

Depending more on faith than on economics or history, Madrid assures us that with the right reforms Spain will eventually grow out of its debt. Every country facing a debt crisis has made the same promise, but has nearly always failed. Excess debt itself prevents growth, and even without the straightjacket of the euro Spain probably cannot grow out of its debt.

Even those who reject debt forgiveness admit that only Germany’s guarantee, hidden behind the ECB, prevented Spain from defaulting. Because the German banking system could not survive a default even in one country, they point out, Berlin has no choice but to guarantee Spanish debt forever.


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Hugh Hendry And The Deflationary Zeitgeist

Courtesy of The Automatic Earth.


Jack Delano Colored drivers entrance, U.S. 1, NY Avenue, Washington, DC Jun 1940

It’s funny how things roll at times. When I wrote yesterday’s Making Money While The World Burns, and quoted Hugh Hendry, one of my heroes – well, close, I love the man for his brain  I hesitated, but thought his words were a great way to start a discussion on what people do when faced with certain conundrums. I certainly never meant to attack Hugh, though words can always be construed to mean things they were not meant to mean.

David Stockman picked up the essay (Jim Kunstler told me to use that word) and retitled it Making Money While The World Burns – The Troubling Case Of Hugh Hendry. Bless David for all the great work he does, and I would never even suggest he shouldn’t add that bit, that’s entirely his prerogative, but I myself would never call Hugh Hendry a ‘troubling case’.

I merely wanted to get a discussion going, and maybe to get people thinking about what they choose and why. Not to judge anyone, who am I to do that, but to get people to ask why they act the way they do, and what it is that makes them tick.

If I would want to judge anyone, it would be the politicians and central bankers who pretend they serve the public and then turn on a dime and screw that same public. Hugh Hendry doesn’t pretend to be anything he’s not. However, I can still ask questions about why he chooses to do what he does, and use that as a mirror, for lack of a better term, to gauge where I stand, what I think, and put that out there for my readers.

But I’m not Hugh Hendry, I’m not a hedge-fund manager, and I don’t morally judge people or tell them what to do and what not. That would be like starting a religion, separating right from wrong for other people, and I have no design on that. I’ll admit I thought about that religion thing in the…
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Have Central Banks Entered An Undeclared War?

Courtesy of Charles Hugh-Smith of OfTwoMinds

The monetary tectonic plates are shifting, and predicting the next global financial earthquake is relatively easy.

I recently suggested that the devaluation of the yen was Japan's Monetary Pearl Harbor: a direct attack on the currencies of its major trading partners: the euro (European Union), the won (South Korea), the Australian dollar (AUD) and the U.S. dollar (USD), which affects both the U.S. and China since China's currency, the renminbi, is pegged to the USD.

Though there have been no overt (public) counter-attacks, this may not reflect monetary peace so much as an undeclared war. Correspondent Mark G. observed that the current geopolitical backdrop is considerably more unsettled than the relatively benign global chessboard in 2008:
 
"The Eurozone and the Pacific Rim now have a pair of regional wars being fought out primarily by financial and monetary means. We can infer that the major central banks won't be anywhere near as cooperative during a crisis as they were in 2008."
 
While the American-European financial sanctions against Russia and Russia's counter-moves are being waged in public, the public response of the Korean and Chinese central banks to Japan's massive devaluation has been limited to grumbling.
 
But it is unlikely that other central banks are limiting their response to Japan's aggressive devaluation to words.
 
Let's start by noting that central banks play two games: one is pure public relations: marionettes on strings beat deflation with sticks and declare they'll save financial parasites with "whatever it takes" monetary policies.
 
Meanwhile, their actions may be mere shadows of the bold policies being trumpeted, or they may be extremes nobody dares make public, for example the Federal Reserve's $16 trillion bailout of literally the entire Western banking sector in the last Global Financial Meltdown.
 
(The Levy Institute came up with $29 trillion after poring over all the data):
 
The U.S. Fed has remained mute, but the yen devaluation has destabilized the global monetary order, whether the Fed acknowledges it publicly or not.
 
Unsurprisingly, central bank public statements don't mention that competing devaluations share certain characteristics with circular firing squads. Beggar thy neighbor policies destabilize


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Deutsche Bank: “People Are Talking About Helicopter Money And Debt Cancellation Being The End Game”

Courtesy of ZeroHedge. View original post here.

If Deutsche Bank's Jim Reid is right, what just took place overnight from the PBOC is just a pleasant start and an enjoyable dress rehearsal of what is about to take place. Where it ends is precisely where we have said it would ever since QE1 was announced in March 2009.

I had a few meetings yesterday and one of the biggest surprises I had was that for the first time in a long time people were talking about helicopter money and debt cancellation being the end game. This was a major theme of our 2013 long-term study but one that we've struggled to get much traction with over the last year. Perhaps there's an increasing weariness that more QE globally whilst inevitable, is a blunt growth tool and that stopping it will be extremely difficult (let alone reversing it) without a positive growth shock. Maybe Japan's move this week in delaying the further sales tax increase and the economy's adverse reaction to the first increase reminds the market how difficult it might be to actually pay the bills with real money. As we said earlier this week it could be that the last few days marks the first steps towards monetization. Anyway, this is not something for today or tomorrow but the fact that different clients brought it up independently of each other makes me think that's its starting to get into people's thoughts.

Indeed it is, as we warned last September in "Bernanke's Helicopter Is Warming Up" and yet everyone will be shocked, shocked, when the playbook that was clearly revealed by Ben Bernanke himself in 2002 is finally implemented:

… A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

      - Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here, November 21, 2002

 





Output Gap Idiocy; Shaky Accounting EU and US Style

 

Courtesy of Mish.

Shaky Accounting EU Style

Inquiring minds note that Italy Accuses Brussels of ‘Shaky’ Accounting. That's certainly not a shocking accusation.

"Shaky" is exactly what one should expect when you get a bunch of nannycrats who believe Nirvana is on the horizon if wealth and taxes could be redistributed properly.

The irony in this case is that Italy pleads for far shakier accounting than Brussels. Let's dive in for a closer look.

Italy has accused the EU of using “shaky” methodology to evaluate countries’ fiscal policies, raising the stakes ahead of next week’s first verdict on the budgets of eurozone member states by the new European Commission.

In an interview with the Financial Times, Pier Carlo Padoan, Italy’s economy minister, said the EU’s measure of output gaps – or the amount by which a country’s gross domestic product falls short of its potential – was outdated and underestimated the depth of the recessions which followed the financial crisis.

The size of Italy’s output gap is crucial because the EU uses it to calculate structural budget deficits, which take into account the impact of economic cycles. The greater the output gap, the greater the leeway conceded by the EU on fiscal matters.

The EU’s measure of the Italian output gap is 3.5 per cent of GDP. Mr Padoan noted that this figure was significantly lower than the equivalent one from the Organisation for Economic Co-operation and Development, of which he has been chief economist. The Paris-based body has estimated Italy’s output gap to to be 5.1 per cent this year, with a new and possibly higher projection due next week.

Mr Padoan added that if the latter number were applied, Italy “would be in structural surplus now and . . . for a long time”. “We would be in a different world, [with] no requests for additional resources, we would have to do nothing. It would change a lot,” he added.

Italy's Argument

Italy actually argues it would be…
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Jobless Claims Below 300,000 for Tenth Straight Week

Jobless Claims Below 300,000 for Tenth Straight Week

Courteys of 

Reuters:

The number of Americans filing new claims for unemployment benefits fell less than expected last week, but continued to point to strengthening labor market conditions.

Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 291,000 for the week ended Nov. 15, the Labor Department said on Thursday.

The labor market continues to tighten up. Last week’s JOLTs report told us that there is a commensurate increase in worker confidence, as quit rates and switches pick up as well. Wage growth has not arrived yet as the better employment conditions are pulling more people who were on the sidelines back into the labor pool. Once that process has finished playing out, average incomes will improve.

Now add in the elixir of plummeting gasoline and heating prices – a massive tax cut for half the country, which lives check to check and spends a fifth of their income on energy costs.

My guess is that the strength in holiday sales shock everyone. When people are more confident in their employment situation, they spend more money. That’s the real wealth effect in America – the one a rising stock market simply cannot produce.

Momentum is building. It’s slow now, but persistent and becoming more evident to more people with each passing day.





A Global Explosion in Ultra High Net Worth Individuals

A Global Explosion in Ultra High Net Worth Individuals

Courtesy of 

UBS and Wealth-X are out with a massive, 53-page report on the state of the global ultra high net worth (UHNW) population in 2014.

The broad strokes of what’s gone on can be observed in the below table:

Screen Shot 2014-11-20 at 3.03.57 PM

What should jump out at you:

* While the total population of UHNW people grew by 6%, their combined wealth grew by 7% from 2013 to 2014. The rich got richer, faster.

* The richer you were, the faster pace your wealth grew, for the most part. You can see that the top three tiers of UHNWs saw a double-digit rate in asset growth versus half that rate for everyone else.

* The real explosion took place in the near-billionaire category of $750 to $999 million. Their ranks grew by 19.9% this year and their wealth grew by over 15%. That’s tremendous.

* The largest two groups of people are individuals with somewhere between $30 million and $99 million in wealth. Combined, these tiers add up to over 150,000 “aspirational” UHNWs globally. They haven’t seen the same lift as those at the top, but I’m sure they’re doing fine.

I’ll have more insights from this report later…

Source:

WORLD ULTRA WEALTH REPORT 2014 (Wealth-X)

 





France Private Sector Output Drops 7th Consecutive Month, Orders Stagnate in Germany, Eurozone Flirts With Contraction

Courtesy of Mish.

Let's take a look at weaker than expected reports from the Eurozone in aggregate, and France and Germany in particular.

France

The Markit Flash France PMI shows French private sector output falls for seventh successive month.

Key points:

  • Flash France Composite Output Index rises to 48.4 (48.2 in October), 2-month high
  • Flash France Services Activity Index climbs to 48.8 (48.3 in October), 3-month high
  • Flash France Manufacturing Output Index falls to 46.5 (48.0 in October ), 3-month low
  • Flash France Manufacturing PMI drops to 47.6 (48.5 in October ), 3-month low

Summary:

While service providers reported the slowest fall in activity of the current three-month period of decline, manufacturers indicated the sharpest reduction in output since August. Lower output at French private sector companies reflected a further decrease in new business. November marked the third consecutive month in which new work has fallen, with the rate of decline accelerating to the sharpest since June 2013.

Employment in the French private sector continued to fall in the latest survey period, in line with the trend observed since November 2013.

French private sector companies reported another drop in outstanding business during November. The latest fall was the seventh in successive months and the sharpest since M ay 2013. Service providers indicated an accelerated decline in backlogs, whereas manufacturers reported a slightly slower fall.

Price trends continued to diverge in November. Input costs rose, with the latest increase the fastest in three months, albeit modest over all. Service providers and manufacturers reported similar rates of input price inflation. However, output prices fell further, amid reports of strong competitive pressures.

My comments on France

With falling commodity prices, especially oil, why have input costs risen? Labor?

Whatever the reason, margins are shrinking rapidly because prices paid is rising while prices received for final goods and services drops. VAT collection will decline as well.

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Spanish Reader on Rise of “Podemos” a New Far-Left Political Party in Spain

 

Courtesy of Mish.

Following is an email from reader David, an unemployed accountant who lives in Spain. He writes about the alleged recovery in "main street", Catalan separatism, and the rise of a far-left political party named Podemos.

David writes…

Hi Mish

I'm a long time reader of your blog from Spain. I'm a 27 years old accountant, currently unemployed, and I enjoy reading your financial, economic and political insights because you are quite spot on regarding the issues you pay attention to, especially the Eurozone and its impact the global scenario.

You sometimes refer to readers who communicate to you about the issues they know and live, so I've decided to do the same, hoping it can be useful.

I remember a few years back during the 2011/12 sovereign bond-spread crisis when you were pointing directly towards France and Italy for troubles, and how you got it right. The flaws of those two countries really hit the headlines in short order. Obviously, Spain is and has been in a mess for many time and you're well aware of that, but I think Spain is going back to the headlines next year, and I wanted to explain why I think so.

Spain has been in a precarious, yet somewhat stable course since the ECB decided to do something on the sovereign crisis. But unemployment has gotten an insignificant relieve and deficit levels keep soaring. "Main Street" is still deteriorating, but we finally have a bit of a relief on layoffs. Even so, the average monthly salary was €1,000 a month before the crisis and now it's €800 or less. Also government largesse is still quite ample regardless of the public sector cuts so shouted by the left.

Nonetheless, the general feeling regarding the economy is that the hemorrhage has stopped. Of course the global downturn is going to halt any kind of "Spanish recovery", if it has ever been one, but the two key risks from Spain in 2015 are political: the new-found Podemos party, and the Catalan separatism issue.


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Initial Unemployment Claims Stay At Bubble Record Levels

Courtesy of Lee Adler of the Wall Street Examiner

The headline, fictional, seasonally adjusted number for initial unemployment claims came in at 291,000, which was not materially more than the Wall Street conomist crowd consensus guess of 285,000. That was a non event.

The actual, not seasonally finagled numbers, which the Wall Street-captured media ignores, shows claims continuing at all time record levels on the basis of claims per million workers. The condition has now persisted for 14 months. I have warned for months that this implied that the central bank financial engineering/credit bubble has been at a dangerous juncture. The media echo chamber continues to present record lows as positive, stubbornly ignoring the historical fact that extremes like this have always led to severe market and economic contractions. The Wall Street Journal headline today blared, “Jobless Claims Fall in Latest Sign of Improving Labor Market.”

According to the Department of Labor the actual, unmanipulated numbers were as follows. “The advance number of actual initial claims under state programs, unadjusted, totaled 285,263 in the week ending November 15, a decrease of 24,075 (or -7.8 percent) from the previous week. The seasonal factors had expected a decrease of 22,827 (or -7.4 percent) from the previous week. There were 327,053 initial claims in the comparable week in 2013. ”

Initial Claims and Annual Rate of Change- Click to enlarge

Initial Claims and Annual Rate of Change- Click to enlarge

The actual week to week change last week was a decrease of around 24,000 which is a slightly less than average decline for that week of November. The average of the prior 10 years for that week was a drop of approximately 32,000. This is not a significant difference.

Actual first time claims were 12.8% lower than the same week a year ago. The normal range of the annual rate of change the past 3.5 years has mostly fluctuated between approximately -5% and -15%. During October the year to year change percentages were at extremes seen only a handful of times since the bungee rebound of 2010. This week’s number is only slightly less strong. There are no signs of material weakening yet.

New claims were 2,026 per million workers (in November nonfarm payrolls). This number is significantly lower than the ratio in the comparable November week at the top of the housing bubble in 2005 and 2006.

Initial Claims Per Million Workers- Click to enlarge


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Zero Hedge

Obama's Path To 'Amnesty' (In 1 Cartoon)

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Tee-daa.....

 

 

As Hans von Spakovsky concluded earlier in the week:

In short, while Reagan and Bush worked closely with Congress to implement the comprehensive legislation that Congress had passed (in the case of Reagan) or would pass shortly thereafter (in the case of Bush), Obama is bypassing Congress entirely. He is unconstitutionally revising existing law and, without congressional approval, imposing new ones  that have been exp...



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Market Shadows

Official Moves in the Market Shadows' Virtual Portfolio

By Ilene 

I officially bought 250 shares of EZCH at $18.76 and sold 300 shares of IGT at $17.09 in Market Shadows' Virtual Portfolio yesterday (Fri. 11-21).

Click here for Thursday's post where I was thinking about buying EZCH. After further reading, I decided to add it to the virtual portfolio and to sell IGT and several other stocks, which we'll be saying goodbye to next week.

Notes

1. th...



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Chart School

The Big Four Economic Indicators: Real Retail Sales

Courtesy of Doug Short.

Note from dshort: With yesterday's release of the Consumer Price Index for October, I've updated Real Retail Sales for October.

Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.

There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:

  • Industrial Production
  • Real Personal Income (excluding Transfer Payments)
  • Nonfarm Employment
  • Real Retail Sales
  • ...

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    All About Trends

    Mid-Day Update

    Reminder: David is available to chat with Members, comments are found below each post.

    Click here for the full report.




    To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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    OpTrader

    Swing trading portfolio - week of November 17th, 2014

    Reminder: OpTrader is available to chat with Members, comments are found below each post.

     

    This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

    We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

    Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

    To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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    Sabrient

    Sector Detector: Investors make up new rules for their new market paradigm

    Reminder: Sabrient is available to chat with Members, comments are found below each post.

    Courtesy of Sabrient Systems and Gradient Analytics

    By Scott Martindale

    Investors in U.S. equities seem to have embraced a new market paradigm in which upside spikes come more swiftly than the downside selloffs. Remember when it used to be the other way around? When fear was stronger than greed? The market is consolidating its gains off the early-October V-bottom reversal, and no one seems to be in any hurry to unload shares this time around, with the holidays rapidly approaching and all. After all, there are bright blue skies directly overhead giving hope and respite from the early freeze blanketing the country.

    In this weekly update, I give my view of the current market environment, offer...



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    Stock World Weekly

    Stock World Weekly

    Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

    The newest Stock World Weekly is ready. Click here for the this weekend's reading and sign in with your PSW user name and password. 

    Picture credit: AnnaER at Pixabay. 

    ...

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    Digital Currencies

    Ukraine Central Bank Bans Bitcoin "To Protect Citizens" From Financing Terrorism

    If you would have supposed that Ukraine had enough problems to make banning bitcoins a backburner issue, you'd have been wrong. The rationale, "to protect consumers' rights" makes little to no sense... The other one, "to keep money in the country" makes more sense. 

    Ukraine Central Bank Bans Bitcoin "To Protect Citizens" From Financing Terrorism

    Courtesy of ZeroHedge. View original post here.

    The Hryvnia has collapsed to new record lows near 15/USD this morning. The Central Bank and bankers "agreed to keep UAH at 15-16/USD" but are &qu...



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    Option Review

    Yamana Gold call options sink

    Yamana Gold call options sink

    By Andrew Wilkinson at Interactive Brokers

    A four-year low for the spot price of gold has had a devastating impact on Yamana Gold (Ticker: AUY), with shares in the name down at the lowest price in six years. Some option traders were especially keen to sell premium and appear to see few signs of a lasting rebound within the next five months. The price of gold suffered again Wednesday as the dollar strengthened and stock prices advanced. The post price of gold fell to $1145 adding further pain to share prices of gold miners. Shares in Yamana Gold tumbled to $3.62 and the lowest price since 2008 as call option sellers used the April expiration contract to write premium at the $5.00 strike. That strike is now 38% above the price of the stock. Premium writers took in around 16-cents per contract o...



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    Pharmboy

    Biotechs & Bubbles

    Reminder: Pharmboy is available to chat with Members, comments are found below each post.

    Well PSW Subscribers....I am still here, barely.  From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.

    First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices.  Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment.  Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer.  For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...



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    Help One Of Our Own PSW Members

    "Hello PSW Members –

    This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

    Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

    http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

    Thank you for you time!




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    Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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