Transcript: Friday, October 18, 2013

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —

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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: An exclusive club.
Google (NASDAQ:GOOG) shares break $1,000, making it only the second stock in the S&P ever to do so. But what is it about Google (NASDAQ:GOOG) that`s so important to your portfolio and your everyday life?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Market milestones.
The numbers are staggering, 20 percent of the S&P 500 hitting 52-week highs and the index itself at another new record. But if earnings growth is tepid, why are stocks skyrocketing?

GHARIB: And the million dollar flip. Buying, fixing, and reselling homes is back. But this time around, the game has changed and some of the biggest returns are coming in just one segment of the market.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for this Friday, October 18th.

MATHISEN: Good evening, everyone, and welcome.

Stocks end an exhausting up and down but mostly up week with some impressive gains and another all-time closing high for the S&P 500. But of all stocks, one stood taller today than just about any other, Google (NASDAQ:GOOG). Google (NASDAQ:GOOG) shares have gone where few stocks have ever gone before, breaking through the $1,000 a share barrier today. The stock closed today at $1,011, up 122 bucks a share, nearly 14 percent, after blowout profits we reported yesterday.

Now, you may know Google (NASDAQ:GOOG) as the world`s top Internet search engine, the owner of YouTube, or is the company who used Android operating systems, powers the largest number of the world smartphones. But there is a lot more to the company and where it sees growth in the future.

Jon Fortt has more on Google (NASDAQ:GOOG) and what`s next.

(BEGIN VIDEOTAPE)

JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: A banner day for Google (NASDAQ:GOOG). The company has arguably its most impressive day of trading ever, rising more than 13 percent and closing above $1,000 per share. Now, the last time it rose that much, 2008, a rough year for stocks when a few good days offset a year and the stock lost half its value.

Today`s trade was all about Google`s third-quarter earnings report and signs the company could prove to be as dominant in the area of smartphones and tablets as it was in the area of the web.

As we approach the tenth anniversary of Google`s IPO next year, the company has grown far beyond its roots as a search engine. Its ad network outside of its sites pulled in more than $3 billion last quarter, 21 percent of revenue.

YouTube, the ubiquitous video site it acquired, now pulls in more than
$1 billion a quarter, and it`s Android operating system has become a global smartphone power house.

Along the way, Google (NASDAQ:GOOG) has become an extension of many of our brains.

UNIDENTIFIED FEMALE: We`re directionally challenged and trying to find different cities and Google (NASDAQ:GOOG) always saves us. We can always pull up the map and find where we`re going.

UNIDENTIFIED MALE: I use the Google (NASDAQ:GOOG) Docs, Google
(NASDAQ:GOOG) Drive, all that stuff I think is brilliant and helps me a bunch with work.

FORTT: Beyond the maps, the video and the Cloud, Google (NASDAQ:GOOG) has become a major player in retirement accounts, too. It`s the top holding at Fidelity, where it`s part of 87 funds. It`s number 7 in Vanguard, where it`s in 30 funds.

In so many ways, Google (NASDAQ:GOOG) is everywhere.

BEN SCHACHTER, MACQUARIE CAPITAL: The Internet in a lot of ways becomes like electricity. It`s just around you all the time, always available. I think that`s where Google (NASDAQ:GOOG) really seems to be pushing the envelope and having all your information available to you wherever you are, at any point, not having to sit at a desk, stare at a screen, not even having to pick up a phone and put it to your ear, but having it simply around you, much like when you think of electricity today.

FORTT: This historic rise for Google (NASDAQ:GOOG), a bit reminiscent of Apple`s run last year which saw it peaked just about $700 a share in September. It tumbled for the next nine months, losing nearly half its value.

We`ll have to see whether Google`s good fortune lasts a bit longer.

For NIGHTLY BUSINESS REPORT, I`m Jon Fortt.

(END VIDEOTAPE)

GHARIB: Well, that record high for Google (NASDAQ:GOOG) helped fuel another day of records on Wall Street, most of the major averages were up by 2 percent or more for the week.

Also powering up stocks, news that China`s economy grew faster than expected in its latest quarter.

Here are the closing digits on Wall Street. The Dow rose 28 points, the NASDAQ jumped 51. It`s now closing in on the key 4,000 level, and the S&P 500 added 11 points, enough for another record close.

So, stocks are obviously back on track, but how long can the positive momentum last?

(BEGIN VIDEOTAPE)

GHARIB (voice-over): Everywhere you look, the stock market continues to hit new milestones, seven of the 10 S&P 500 sectors traded at record levels today, led by health care and consumer discretionary, both up more than 30 percent this year. The rally is even broader than that, more than
20 percent of the S&P 500 companies are at new 52-week highs, many at all- time highs.

On top of that, the blue chip Dow is up more than 17 percent this year. The Russell 2000 and S&P MidCap 400 are at all-time highs, and the NASDAQ is at its highest level in 13 years.

But how long can this last? Usually, it`s corporate earnings that power up stock prices. That`s been happening for the past three years.
But now, the tables have turned. Earnings have slowed, they are up only
4.3 percent, but stocks are skyrocketing.

The S&P 500 stock index is up 22 percent this year, and it could go higher if companies like Google (NASDAQ:GOOG) continue to wow investors.
But the government shutdown took a huge bite out of the economy. What will the lasting effects of that be? Can lawmakers agree on a budget? When will the Federal Reserve begin to taper its stimulus, and will the answers to those questions temper investors appetite for risk?

(END VIDEOTAPE)

MATHISEN: We turn to Liz Ann Sonders now for answers on where the market is heading and whether she sees this good streak for equities continuing. She`s chief investment strategist at Charles Schwab.

Liz Ann, welcome.

You know, Google`s earnings notwithstanding, the numbers so far are relatively tepid, which begs the question, has the market gotten ahead of itself?

LIZ ANN SONDERS, CHARLES SCHWAB CHIEF INVESTMENT STRATEGIST: I don`t think so, Ty. I think, you sometimes in an environment as you were for the first three and a half years of this bull market, where earnings powered ahead at a faster pace, the prices went up.

So, the valuation, the P/E actually came down as the market was doing well. So far this year, we`ve actually been in an expansion evaluation mode. In other words, prices are moving up faster than earnings. We`re still on a forward earnings basis though, still inexpensive relative to the long-term norm, and the conditions for continued evaluation expansion are there. So, it`s a missed perception a slowing in earnings growth automatically means problems for the stock market. We`re in the later stage evaluation expansion.

GHARIB: Liz Ann, I want to ask you about Google (NASDAQ:GOOG) but I know you can`t make recommendations on individual stocks but more about what is Google (NASDAQ:GOOG) hitting a thousand, that big round number mean for market direction and investor confidence? Are we getting a little bit ahead of ourselves?

SONDERS: You know, I don`t think so from a market perspective. I think — I think Google (NASDAQ:GOOG) is certainly a proxy for technology.
It`s a proxy for the NASDAQ. And, you know, as you mentioned just before we came on here, the NASDAQ has a 13-year high. We`re closing at 4,000. I think a few years ago, it was unthinkable that we might be getting close to the 5,000 level peak that we saw.

And we have to remember that technology really was left out of the last bull market from 2003 to 2007. So, it has been a very long drought in terms of this love affair for technology, and we may start to see the seeds of that, and I think that`s a good thing. We think the technology sector is extremely attractive right now. So, anything that drives a little bit more of that enthusiasm for the sector, given the fundamentals is very strong, evaluation is very strong, I think, is a good thing.

MATHISEN: You know, in some ways, Liz Ann, I think that the environment for stocks right now is about as perfect as it can be. You`ve got reasonable but slow growth. It`s certainly not run away growth.
You`ve got virtually no inflation to speak of and you have low interest rates, which means that the cost of capital is down and there`s no competition from bonds.

So, I wonder why individual investors haven`t been buying with both hands and fists on — in this market. What are investors telling you and telling Schwab?

SONDERS: There is a tremendous amount of latent skepticism and I think even still bearishness. And a lot of it has to do with muscle memory and the severity of the financial crisis, both in economic terms and market terms was so severe, and it came not that far after, of course, the last bubble burst into 2000. And I think that muscle memory really hangs around for quite some time.

So, what we`re hearing is still much more concern about the macro, still a lot of sideline money looking for the next shoe to drop but to your point, Tyler, this environment, which confounds a lot of people because we don`t have strong economic growth. We used to call an environment like this goldilocks. I think people are hesitant to use a term like that right now. But to your point, that`s the kind of environment you want to see in this grinding higher, slowly is pulling investors in, getting them more emotionally attached to this market.

If you had straight shot up late 1990s type environment, that would be more concerning. I love the fact that we have this wall of worry, and when that starts to dissipate and that enthusiasm turns into euphoria, that`s when you want to be a bit more cautious.

MATHISEN: Liz Ann, great to see you as always.

Liz Ann Sonders is chief investment strategist at Charles Schwab.

SONDERS: Thank you.

GHARIB: Well, it`s a banner day for General Electric (NYSE:GE) today.
It was the best performing stock in the Dow. Shares of General Electric
(NYSE:GE) jumped 3.5 percent to $25.55. That`s a five-year high.

Investors brought up the stock on better than expected quarterly earnings. Now, profits fell by 9 percent, but earnings per share came in at 40 cents and that beat estimates by a nickel. Revenues were also down, slipping 1 percent to $35 billion, but the company reported a record backlog with orders rising 19 percent and that gave investors a lot to look forward to.

MATHISEN: One of the country`s biggest investment banks, Morgan Stanley (NASDAQ:NBXH) (NYSE:MS), reporting third-quarter earnings. And the good news is pretty good. Profits nearly doubled to just over a billion dollars, mostly thanks to an increase in stock sales and trading revenue, and its wealth management unit.

CEO James Gorman said the bank`s plan to focus on individual clients and to sell off non-core assets like a stake and insurance broker are paying off for investors. Shares ended 2.5 percent higher today.

GHARIB: Another fine for JPMorgan (NYSE:JPM) Chase, it`s agreed to pay the Federal Housing Finance Agency a whopping $4 billion in penalties.
“The Wall Street Journal” says the nation`s biggest bank reached that settlement today for misleading the mortgage agency about the quality of risky home loans that it bundled up and sold as securities during the housing boom. The deal is a lot less though the $6 billion the housing agency was originally asking for.

MATHISEN: Well, if you`ve ever been slammed by overdraft fees by your bank, help may be on the way, taking a page out of the community bank playbook. Bank of America (NYSE:BAC) is planning to offer a new type of checking account that will prevent customers from going over their account balances when making an ATM withdraw or making an automatic online payment.

GHARIB: Another setback for the troubled rollout of Washington`s online health care exchanges, all apart of the Affordable Care Act.

Some big health insurance companies say they`ve gotten faulty data from the federal marketplace, enough to hamper their ability to even handle the modest number of enrollees who have signed up so far. Problems include duplicate enrollments, spouses reported as children, missing data field and questionable eligibility determination.

MATHISEN: And still ahead, home flipping, it`s back in a big way.
But this time, it`s different and big returns coming in the very highest ends of the housing market.

First, a look, though, at how the international markets closed today.

(MUSIC)

MATHISEN: With home foreclosures on the decline mortgage rates are relatively low and home buyers are focusing on constructing more modest homes. Buyers who flip houses are now entering a whole new market super high-end homes.

Diana Olick has the story.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
There is a lot more than a coat of paint going into this Los Angeles home.

NICK SINATRA, SINATRA & CO. REAL ESTATE: We`ll take down retaining walls and the studs, and we`ll build up with an architecturally designed home that flows. We really take the extra time to order the finishes that higher-end customers are going to respond to.

OLICK: Because high-end customers are Nicholas Sinatra`s bread and butter. His company, American Coastal Properties, specializes in buying, remodeling and flipping multi million-dollar homes.

SINATRA: In the hotter markets like coast of southern California, you have unique situation where there`s high barrier of entry and highly desirable neighborhood and people want to come in and there`s no supply, there`s no inventory.

OLICK: Rather than go through all the zoning and tax issues involved in a total tear down, Sinatra and his team of architects and designers seek out homes in sought after locations that they can get at a slight discount because they need some work.

SINATRA: This really came out great.

OLICK: They bought this one for $735,000, redid it inside and out and listed it for close to $2 million. It`s riskier because it`s pricier but demand is there.

SINATRA: You see a lot of foreign buyers coming in. They`re all cash buyers.

OLICK (on camera): With so few homes on the market, some flippers are canvassing older still popular neighborhoods just like this one and actually ringing doorbells to see if anybody wants to sell.

DAREN BLOMQUIST, REALYTRAC VP: It`s a bigger up front risk and on the back end, you have usually fewer buyers, but the pay off also can be much bigger. We`re showing the average gross profit on one of these high-end flips is about $240,000, compared to about a $55,000 average profit on the lower end.

SINATRA: It does make the backyard pop.

OLICK: American Coastal, which is for now, just in southern California, will flip between 30 and 50 homes this year. That thanks to a
$50 million dollar infusion from private equity firm Colony Capital, and the Pritzker/Vlock Family Office.

SINATRA: We`re looking at properties from $1 million in acquisition price up to, we just purchased one for $9.5 million.

OLICK: They will spend anywhere from 50 percent to 100 percent of the purchase price on remodeling but Sinatra claims they`re seeing returns in the high teens and low 20s. It helps that there are very few competitors in his space. But given the possibilities —

SINATRA: This could be a home office back here.

OLICK: — that won`t last long.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.

(END VIDEOTAPE)

MATHISEN: And Diana has more on the trend on high-end house flipping on our Web site, NBR.com.

GHARIB: Earnings and more earnings, that`s where we begin tonight`s “Market Focus”.

Honeywell reported earnings in line with Wall Street estimates, but weak demand for its defense products and slow economic growth prompted the firm to cut its full year revenue forecast. The company blames the weak results in its defense unit to supply problems and the sequestration.
Shares fell 2 1/2 percent to $84.58.

Schlumberger (NYSE:SLB), the world`s largest oilfield services company reported a better than expected rise in its quarterly profits. The company benefiting from increased offshore drilling in North America and from growing international demand. Schlumberger (NYSE:SLB) has topped analysts` estimates for eight straight quarters. The stock popped to almost 3 percent to $93.99.

Demand for drilling also helped Baker Hughes` bottom line. This oilfield services company also beat Wall Street forecast, citing healthy demand from the Middle East and Asia. The stock spiked 7 percent to $55.55.

MATHISEN: Ingersoll Rand beat Wall Street earnings estimates, thanks to a rebound in the U.S. housing market. The company which makes air conditioners, refrigeration units, saw an increase in demand for its products as more Americans bought new homes. That helped lift the stock 5 percent to $66.85.

Intuitive Surgical`s profit dropped as sales of its flagship Da Vinci surgical arm declined sharply. The company also warning investors that its full year revenue growth is likely going to come in at the lower half of its forecast range. Shares dropped almost 6 percent to $376.52.

And the power company NRG Energy (NYSE:NRG) plans to pay $2.6 billion to acquire the assets of the bankrupt unregulated power producer Edison Mission Energy, the deal will nearly quadruple NRG`s wind generation capacity, making it the nation`s third largest producer of renewable energy. If approved, NRG expects the deal to close in the first quarter of next year. The stock climbed almost 5 percent today to $29.30.

GHARIB: Our market monitor guest tonight has these words of advice for investors: buy good quality stocks and stay away from risky investments. He`s James Awad, chairman of Plimsoll Mark Capital.

Jim, always pleasure to have you on.

JAMES AWAD, PLIMSOLL MARK CAPITAL CHAIRMAN: Thank you.

GHARIB: So, you heard our reporting, all these market records, Google
(NASDAQ:GOOG) hitting a record $1,000 price. What`s your take on the market? Can it keep up this momentum or are we getting into a dangerous territory?

AWAD: Well, I agree with a lot of what Liz Ann said, but I will add that valuations are now fair, not cheap, that we are going to revisit Washington in a few months, that at some pound the Fed is going to begin the taper and that there is speculation in the credit markets, many people would say as bad as 2007 because the Fed has pushed people out the risk curve.

So, you can stay in but you have to stay in with quality stories, with good balance sheets and either good income or earnings stories.

MATHISEN: You know, Jim, we began the broadcast tonight with a story about Google (NASDAQ:GOOG). Do you own it? Would you buy it? It was up
13 percent today.

AWAD: Yes, it`s very hard. Look, if you — I don`t own it. If you wanted to own it and you had a four or five year outlook, I`m sure you could buy it and end up making money.

But intuitively, it reminds me of Apple (NASDAQ:AAPL) when Apple
(NASDAQ:AAPL) hit $700, that people tend to get over excited and most people who study the company have a value of about $880 to $1,200. So, it`s about in the middle of that range.

So, if you didn`t own it, you can buy half, but I would wait for a correction to buy the rest.

GHARIB: So, you just mentioned Apple (NASDAQ:AAPL) and that`s one of your recommendations for tonight. Let`s talk about Apple (NASDAQ:AAPL).
It`s at $508 a share. It`s been creeping back up. Why do you like it at this price?

AWAD: OK. So it`s in the middle of a new product flow, many of which look exciting. It`s got a tremendous amount of cash. Its evaluation is not high, roughly $45 of earnings next year.

And some very smartest people in the industry are buying it. So, I like the company — the company of the people buying the stock. I`m not sure it will get back to $700 but I`m not sure why it couldn`t get to $600.

MATHISEN: Let`s talk about an old favorite, General Electric (NYSE:GE), which has not been on many people`s buy list for quite a while, but it`s on yours right now.

AWAD: Well, they are transforming the nature of the company, reducing finance, reducing media, and increasing infrastructure and industrial, which increases the margins and the growth rate. So, you get a 3 percent dividend on a dollar idea (ph) of earnings next year, I think the stock could go up 10 percent, so you get a 13 percent total return with good quality in G.E.

GHARIB: Let`s talk about Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) which reported earnings, doing very well. The stock has been climbing actually all year as you look at this chart here. It`s now at $29.69. What`s attractive here?

AWAD: Well, again, here`s a case where Mr. Gorman has dramatically changed the complexion of the company, lowering the volatile parts of the business, increasing exposure to money management, asset management, which is high margin and stable. So, the inherent profitability of the company is increasing, and it`s got about a $27 tangible book and estimates next year are for 2.65 (ph). So I could see the stock going up to $34 or so.

MATHISEN: All right. Let`s take your last choice, which is not one I`m familiar with. TCP Capital ticker TCPC. What do they do and why do you like them?

AWAD: OK. So, it`s a business development corporation, which is related think of it conceptual as an REIT because they don`t pay earnings.
They pass that along to shareholders.

So, big banks are not lending much to small and medium size companies anymore because of regulation and capital constraints. And this business development corporation industry now replaces banks and this is one of the highest quality ones. They have a wide variety of industries they lend to, to high quality medium sized companies. They sit on the top of the balance sheet with senior debt, variable rate. It`s got almost a 9 percent yield.

I met with management this week. This is quality 8 1/2 percent, 9 percent yielder, and I think over — it`s selling very close to book value and I think they can grow the book value and income stream over time.

So, it`s not without risk. If you went into a 2008 kind of period, these kinds of stocks would not do well. But I think we`re in a stable economic environment. So in the sweet spot that we`re in, I think it would be a good total return stock.

MATHISEN: All right. Sounds really good, Jim. Any disclosures to make?

AWAD: Well, I own TCP for myself and my clients, and we own the Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) and G.E. bonds for our clients and myself.

GHARIB: Thank you so much, Jim. Have a great weekend.

AWAD: Thank you.

GHARIB: James Awad, chairman of Plimsoll Market Capital.

And coming up next, video gaming, it was a sector in decline. So, why is it suddenly powering up?

But, first, how commodities, treasuries and currencies performed today.

(MUSIC)

MATHISEN: The 16-day partial shut down of the government had a big impact on shopping, with Americans pulling back on spending during the few days of that work stoppage. Retail research firm ShopperTrak reports that sales fell 7 1/2 percent in the first week of October compared with one year ago.

GHARIB: But sales of video games are booming. They shot up 27 percent in September. They got a huge boost from the highly anticipated release last month of “Grand Theft Auto V”.

And as Julia Boorstin tells us, the video game industry is making a big come back.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
The record-breaking launch of “Grand Theft Auto V” was a game changer for the struggling video game business. Pent-up demand for the game, it had been five years since the last one in the franchise paid off big time.
Game maker Take-Two Interactive reported a record $1 billion in sales for the game in just its first three days.

Thanks to that hit, total September game sales surged more than 50 percent from a year earlier. Over half of the sales were “Grand Theft Auto”.

DOUG CREUTZ, COWEN & CO.: The high-quality games are selling as well as they ever have, really better than they ever have. The concentration of the top of the industry has become enormous.

BOORSTIN: And Take-Two success with “Grand Theft Auto” last month bodes well for its competitor`s big game watchers this fall. People have proven willing to pay $60 for the biggest brand console games.

UNIDENTIFIED MALE: The new game looks really cool.

UNIDENTIFIED FEMALE: “Call of Duty”, yes. Yes, definitely.

UNIDENTIFIED MALE: I`m more excited about the new “Assassin Creed”
and “Call of Duty: Ghosts”.

BOORSTIN: It`s a crowded follow with Ubisoft`s “Assassin Creed IV:
Black Flag” and Electronic Arts (NASDAQ:ERTS) “Battlefield 4” launching October 29th. A week later, Activision`s “Call of Duty: Ghosts” is expected to be the second biggest game of the year and it could even top “Grand Theft Auto V”.

In contrast, consoles suffered last month. Hardware sales falling 13 percent, no surprise as consumers wait for Sony (NYSE:SNE) to launch the
PS4 and Microsoft (NASDAQ:MSFT) to introduce the Xbox One.

UNIDENTIFIED MALE: I`m going to buy the PlayStation 4 as soon as it comes out.

UNIDENTIFIED FEMALE: Xbox One definitely because we`ve grown up with the Xbox.

UNIDENTIFIED MALE: I`m hoping my parents spend a lot of money for Christmas. That would be the best option.

CREUTZ: It`s been a long time since these current consoles we have out launch and there is pent-up demand for something new and you also have a lot of great looking software coming out over the next year, which I think will support demand.

So I`m pretty optimistic that this cycle will get off to a very good start.

BOORSTIN: And while September`s big gains are about physical sales, this next cycle is increasingly about digital, which accounts for about half of all consumer spending on games.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

MATHISEN: And finally tonight, we now know the identity of the person who bid nearly a million dollars to buy the car turned submarine that James Bond drove in the 007 classic “The Spy Who Loved Me.” It`s Elon Musk, the billionaire co-funder PayPal, SpaceX and Tesla Motors (NASDAQ:TSLA). Musk plans to take the movie prop, which doesn`t even work, and turn it into an actual car that drives on land and then becomes a submarine in water just like in the movie.

And if there is one guy, Susie, who can do that, it may well be Elon Musk. I can`t imagine there is a lot of demand for cars like this.

GHARIB: So, you`ve done a test drive on the Tesla, when this becomes reality you have to do a test drive, but you need a wet suit apparently.

MATHISEN: As I like to do it. Well, all right. We`ll go out in the Hudson and do it together.

GHARIB: That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. I have a great weekend. Thanks for watching.

MATHISEN: And thanks from me, as well. I`m Tyler Mathisen. Have a great weekend. We`ll see you here on Monday night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2013 CNBC, Inc.

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