U.S. stock futures fall as crude oil prices plunge 25% on price-war fears


U.S stock futures and crude oil prices plunged in electronic trading late Sunday, as fears of a global oil-price war combined with coronavirus fears to rattle traders.

Dow Jones Industrial Average futures
YM00,
-4.86%

were last down more than 1,200 points as S&P 500 futures
ES00,
-4.89%

and Nasdaq Composite futures
NQ00,
-4.82%

tumbled more nearly 5%.

S&P 500 futures trading was briefly halted late Sunday when so-called circuit breakers were triggered after a 5% fall.

Read:Here’s when S&P 500 circuit breakers kick in on Monday

West Texas Intermediate crude for April delivery
CLJ20,
-27.30%

plummeted 26% to $30.47 on Sunday, while May Brent crude
BRNK20,
-26.06%

the global crude benchmark, fell 25% to $33.87 a barrel.

Oil futures plunged 10% on Friday after talks between the Organization of the Petroleum Exporting Countries and their allies collapsed, with Russia refusing to agree to a Saudi-led plan for additional crude production cuts.

In response, Saudi Arabia over the weekend slashed crude prices and is preparing to increase production, in a direct attack against Russia’s market share, the Wall Street Journal reported.

See:An all-out war for dominance has erupted among OPEC and its allies, and now oil investors brace for a race to the bottom on prices

Goldman Sachs analysts on Sunday said a price war could push crude prices down to $20 a barrel, especially as the economic slowdown caused by the coronavirus outbreak slows global demand. Those price levels “will start creating acute financial stress and declining production from shale as well as other high-cost producers,” Goldman warned.

Read:Goldman says coronavirus and oil ‘price war’ could see crude plunge into the $20s

“Complete pandemonium at the open,” wrote Stephen Innes, chief market strategist at AxiCorp, late Sunday. “The shock-and-awe Saudi strategy will propel oil markets into a period of radical uncertainty. Russia balking was one thing, but Saudi ramping up production is a bird of another feather.”

“U.S. shale and Canadian tar sands are in for a nightmarish year, I fear,” wrote Jeffrey Halley, senior Asia Pacific market strategist at Oanda, late Sunday. “Production becoming a battle of who has the deepest pockets.”

On the COVID-19 front, Italy virtually locked down its northern region, containing about a quarter of its population, on Sunday in an effort to slow the spread of the coronavirus outbreak. Meanwhile, a number of schools closed in California and events were canceled, as a cruise ship hit by coronavirus prepared to dock in Oakland on Monday, with authorities preparing plans to transport the 3,500 passengers to military bases around the country for testing and quartantine. As of Sunday, the virus had sickened 107,897 people worldwide, with 3,658 deaths.

On Friday, the Dow Jones Industrial Average
DJIA,
-0.98%

settled 256.50 points lower, or 1%, to 25,864.78, while the S&P 500
SPX,
-1.70%

lost 51.57 points, or 1.7%, to close at 2,972.37. The Nasdaq Composite
COMP,
-1.86%

finished 162.98 points lower, or 1.9%, at 8,575.62.

Mark DeCambre contributed to this report.



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EWU: I Was Much Too Optimistic, Uncertainty To Remain A Headwind – iShares MSCI United Kingdom ETF (NYSEARCA:EWU)


Main Thesis

The purpose of this article is to evaluate the iShares MSCI United Kingdom ETF (EWU) as an investment option at its current market price. While I was optimistic on British equities heading in to 2020, EWU has been under pressure since mid-January.

The recent election provided some clarity on Brexit, but negotiations continue to make little substantive progress, and that is clouding the outlook for what a post-Brexit United Kingdom will look like. Fortunately, optimism among consumers and businesses remains relatively high. This has supported surprisingly strong retail figures and a positive outlook for business investment. However, continued uncertainty is likely to cap this momentum going forward. While British stocks do appear cheap, compared to their U.S. and European counterparts, I see the chances of out-performance as quite slim as we move deeper in to the year.

Background

First, a little about EWU. The fund’s stated objective is “to track the investment results of an index composed of U.K. equities.” The fund only offers exposure to large and mid-sized companies that are based in the United Kingdom. EWU is currently trading at $28.94/share and yields 4.87% annually. Looking back on my coverage of EWU, I recommended getting in to the fund late last year, and that trade generated some alpha in the short-term. However, I reiterated a bullish stance as 2020 got underway, as I saw the Tory victory in December elections as a tailwind for British equities. This call proved incorrect, as EWU has seen more than its share of selling since the market correction got underway, as shown below:

Source: Seeking Alpha

Given this sharp drop, I wanted to give an updated review of EWU, and discuss where my thinking erred in January. After review, while some may see the broad market’s decline as a buying opportunity, and I would as well, I am shirting to a more neutral stance on EWU individually. While I believe the fund could push higher going forward, I see little chance of British equities out-performing the S&P 500 in the short-term, and believe uncertainty surrounding Brexit will continue to weigh on the fund.

The Good: British Equities Remain Cheap

To start, I want to begin with a primary reason why investors may consider looking at British equities. Specifically, this relates to the relative cheapness of equity prices in the U.K., compared to the rest of the world. In fairness, this has been the case for some time, and funds like EWU have been lagging other broad-based funds. However, with equity markets seeing a high level of turmoil right now, I believe it is an opportune time to really look for value. Simply, if value options are starting to pique investor interest, that is going to lead them to the U.K.

To see why, consider the cost to own a broad basket of British equities, compared to the rest of the world, as measured by P/E ratios. According to data compiled by Bloomberg, the broad U.K. index is trading at a 20% discount to the rest of the world, as shown in the graph below:

Source: Bloomberg

As you can see, this is a marked discount, and it is especially notable as it has reached a level not seen since 2010.

My takeaway here is simple, British equities appear very reasonably priced on a relative basis. With uncertainty regarding global growth putting investors on edge, an index trading at a marked discount to the world could look especially attractive. Considering EWU offers exclusive exposure to large and mid-cap British companies, this valuation story remains a positive for the fund.

The Good: Retail Sales Have Been On The Rise

My next point also offers a positive slant. While U.K. retail sales were sluggish for most of 2019, the new year has started on a bit of a high note. In fact, total retail sales increased 1.6% for the month of January, which was the best reading in almost two years, as shown below:

Source: Bloomberg

As you can see, this is a pretty good reading, and it has come at a welcome time. After the December election, business and consumer confidence rose, and it turns out some of that confidence translated in to actual sales.

Of course, the December win for the Tories was certainly not the sole reason for an uptick in retail. One especially important area that has kept the British economy from tipping in to a recession has been the resilient labor market. Despite the uncertainty created by the Brexit vote, employment figures have actually improved since the vote was held in 2016. With the unemployment rate consistently dropping, the current figure is at a generational low:

Source: Deloitte

My takeaway here is that these stories, increasing retail sales and low unemployment, should provide some downside protection for British equities. Both of these metrics tell of a generally strong consumer, all things considered. With equities already at cheap prices, continued strength in the consumer retail sector should be a modest tailwind going forward.

Business Confidence Rose, But Investment Is Subdued

My next points have a more cautious outlook, and concern the general state of the British economy. As I noted in my prior review, investors and business leaders generally cheered the December election outcome. The result gave the Conservative Party a clear majority, and also helped remove some of the uncertainty regarding Brexit. While plenty of uncertainty still exists, it ended the constant back and forth between the Prime Minister and the Labour Party. With the Conservatives in full control, Brexit became the reality. Of course, this still left the major details of trade to be determined, but, ultimately, the U.K. officially exited the European Union, which was a development that had been in-progress for over three years.

Looking back, the initial reaction to the election was positive in the business community. In fact, confidence broadly soared in C-suites, according to a survey conducted by Deloitte, with the results shown in the graph below:

Source: Deloitte

Clearly, this was a positive sign, and investors were hopeful readings like this would result in increased business investment and activity.

While increased confidence is good news, it is only half the story. The other half is actual results, and those have not materialized as of yet. While new investment may indeed pick up in the short-term, recent history shows a lot of weakness in this area. Specifically, business investment growth has been negative in five out of eight quarters in the last two years, including a sharp drop in Q4 last year, as shown below:

Source: Bloomberg

My takeaway here is betting now on the backdrop of higher optimism levels is not a sure thing. While there may certainly be increased investment in the short-term, recent figures have been quite weak. Therefore, if we see only a modest increase in the first few quarters this year, it will not make up for the lack of investment we have seen over the past three to four years post-Brexit. Simply, the U.K. economy has a long way to go, so investors should temper their expectations. Yes, business activity could get a boost, but when we consider the starting point is very low, we should look at any future gains critically before declaring a resounding win.

Energy Exposure Will Continue To Pressure The Fund

My next point goes back to EWU individually. Specifically, I want to take a look at the underlying holdings of the fund, with attention to the third largest sector of the fund. This is the Energy sector, which makes up over 13% of total fund assets, as shown below:

Source: iShares

This exposure is largely from just two companies held by EWU, which are BP PLC (BP) and Royal Dutch Shell PLC (RDS.A) (RDS.B). The good news, for myself and other “dividend seekers” especially, is that both these companies have fairly strong dividend track records, and their current yields are quite high. The bad news is a key reason why their yields are so high is because the share prices have been pummeled in the short-term. Simply, shares in the Energy sector have come under intense pressure over the past few months, as the price of oil has fallen off a cliff. Consider that, while broader equity markets have been falling in 2020, oil has lost roughly a third of its value during the same time period:

Source: CNBC

Clearly, this exposure has been a drag on EWU in the short-term. Going forward from here, investors could look at this two ways. One way could be to buy in to a beaten down sector, as it may represent a value opportunity. The other is to avoid it, as it could certainly see continued under-performance.

My takeaway is this is likely a reasonable buy area for the longer term, but investors who do buy in now need to anticipate further losses, so they need to consider their own risk tolerance. While Energy shares generally seem attractively priced, the macro-environment for this sector will be challenging for a while. Consider that this past week, OPEC+ failed to reach an agreement on production cuts going forward, which sent the price of crude spiraling downward. Investors had anticipated a significant action to be announced after this meeting so, when it did not, crude oil lost almost 10% of its value, its worst drop in a single day in five years.

The point here is that production is not likely to be cut to meet declining demand any time soon. As global growth concerns driven by coronavirus fears weigh on cyclical sectors, Energy will continue to hurt EWU’s total return in the weeks, and perhaps months, ahead. While a bottom may be in sight soon, the current exposure is not something to get excited about at this time.

GDP Growth Has Been Weak, Outlook Not Clear

My final points touch on my rationale for lowering my outlook on EWU, as they relate to the British economy as a whole. Looking back at the past few years of GDP growth, we can see the U.K. has been struggling under the current climate. While 2018 saw improvements over the prior year, 2019 actually saw less growth on a year-over-year basis, as shown below:

Source: The Guardian

Of course, it has been known for some time that the U.K. has struggled as it contends with the fallout from Brexit. However, December’s election and January’s subsequent withdrawal was supposed to clear up some of the uncertainty. However, as we sit here in mid-March, the uncertainty surrounding whether or not the U.K. would leave has been removed, but the uncertainty surrounding what that actually means is still unresolved.

And the problem is this could be the reality for some time. According to a recent report by the BBC, the U.K. has completed nineteen trade deals for post-Brexit activity. While this may sound like substantial progress, consider that all nineteen of these deals were created while the U.K. was covered under EU trade agreements, and were simply “rolled over” to continue between the U.K. and the corresponding countries now that the U.K. is no longer in the EU. These deals, while important, only represent about 8% of U.K. trade, and include countries like Chile, South Korea, Israel, and Switzerland, among others. These are mostly smaller countries that do not make up the bulk of U.K. trade activity. In fact, the U.K. does more than half of its trade with EU-member countries and the United States, as shown below:

Source: BBC

Of course, this leaves some room for upside if the U.K. is able to strike a mutually beneficial deal with the EU. The problem is that negotiations will likely be on-going for a while, and the lack of progress so far is not encouraging. Similar to the Brexit negotiations, I would expect a lot of back and forth, posturing, and little in the way of results in the near term. Unfortunately, progress to date has not been encouraging, and both sides appear a bit contentious.

According to a report from the BBC, both the U.K. and EU governments have crafted opening documents on what they hope the trade deal will accomplish, as well as laying out items they do not wish to negotiate. The initial discussions appear to show critical differences on key topics.

For example, on issues concerning legislation, state aid, individual trade deals, and fishing licenses, both sides seem quite far apart. Taken one at a time, while the U.K. does not want to be beholden to current EU legislation that is updated in the future, the EU does not want to accept that exclusion, as it is concerned about the UK gaining a competitive advantage. With respect to industry support, the U.K. is looking for the ability to subsidize any domestic industries it chooses, while the EU wants to continue the current restrictions. Further, while the EU is hoping to create one deal that is all encompassing, the U.K. has laid out a vision for creating mini-trade deals for difference areas and sectors, such as immigration and fishing licenses in its seas.

My takeaway here is that these are substantial differences in critical areas, so I would not expect an agreement in the near term. This has exposed the reality that while Brexit is “done”, the impact from Brexit continues to be a challenging economic environment, and one of uncertainty. With trade negotiations expected to occur through the Spring of this year, business leaders and consumers will need to contend with the uncertainty for the foreseeable future, and that will undoubtedly be a headwind for U.K. equities, and EWU by extension.

Bottom Line

My call on EWU was profitable, for a time, but has ultimately turned out to be too optimistic. While I saw the December election providing a tailwind to the economy and equities, that has not truly materialized, and EWU has fallen short. Looking ahead, I was tempted to view current levels as a clear buy signal, but I have re-evaluated my outlook and lowered my expectations. While the valuation and dividend stories are more attractive than the last time around, I see continued weakness in GDP growth and business investment in the U.K. as items that will hinder any chance of out-performance in the short-term. With ongoing trade negotiations unlikely to offer a resolution any time soon, I believe EWU will continue to face significant pressure compared to other broad equity funds. Therefore, while I see an argument for buying in to a beaten down area and obtaining an above-average dividend yield, I believe lowering my outlook to “neutral” at this time makes sense.

Disclosure: I am/we are long EWU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Boeing proposal to avoid MAX wiring shift does not win U.S. support By Reuters



By David Shepardson

WASHINGTON (Reuters) – Boeing (NYSE:) Co’s proposal to leave wiring bundles in place on the grounded 737 MAX has not won the backing of U.S. aviation regulators, a person briefed on the matter told Reuters.

Last month, Boeing told the Federal Aviation Administration (FAA) it does not believe it needs to separate or move wiring bundles on its grounded 737 MAX jetliner that regulators have warned could short circuit with catastrophic consequences.

The source said the FAA told Boeing on Friday that it did not agree with the planemaker’s argument that the planes’ wiring bundles meet safety standards and now it is up to Boeing to decide how to proceed.

The FAA said Sunday it “continues to engage with Boeing as the company works to address a recently discovered wiring issue with the 737 MAX. The manufacturer must demonstrate compliance with all certification standards.”

Boeing said Sunday it was in ongoing discussions with the FAA over the issue. Boeing could opt to make a new proposal or move the bundles or try to convince the FAA to reconsider its position, but a U.S. official said it was “unlikely” the FAA would reconsider.

Boeing and the FAA first said in early January they were reviewing a wiring issue that could potentially cause a short circuit on the 737 MAX, and under certain circumstances lead to a crash if pilots did not react in time.

Boeing’s 737 MAX was grounded worldwide last March after two crashes in Indonesia and Ethiopia killed 346 people within five months.

There are more than a dozen different locations on the 737 MAX where wiring bundles may be too close together. Most of the locations are under the cockpit in an electrical bay.

If the bundles pose a potential hazard, regulations would typically require separating the bundles or adding a physical barrier.

Boeing has noted in talks with the FAA that the same wiring bundles are in the 737 NG, which has been in service since 1997 and logged 205 million flight hours without any wiring issues.

New safety rules on wiring were adopted in the aftermath of the 1998 Swiss Air 111 crash.

A company official told Reuters in January Boeing had been working on a design that would separate the wiring bundles, if necessary. Moving the bundles could pose further delays to the return of the MAX, however, a key certification test flight is not expected until April or later.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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As coronavirus spreads, Frontier Airlines passengers cry foul over cancelation fees — the airline calls it a ‘misunderstanding’


Frontier Airlines said Sunday that, despite complaints from consumers who said they were being charged change and cancelation fees, it will honor a pledge to waive them due to COVID-19.

Some passengers looking to change or cancel their flights on Frontier Airlines because of concerns about the coronavirus epidemic had believed they were out of luck. The airline, which is owned by private-equity firm Indigo Partners, appeared to have rescinded a previously announced policy of waiving some flight-change and cancellation fees amid the coronavirus outbreak.

Frontier had told MarketWatch earlier this week that customers with existing reservations between March 3 and 16 would be allowed to change their flights or cancel them for a flight credit valid for 90 days, free of charge. Major airlines including American
AAL,
-0.43%
,
United
UAL,
+0.98%

and Delta
DAL,
+1.95%

have enacted similar policies recently as coronavirus has spread.

But a spokewoman for the airline said that the passengers in question should contact the airline, and said that the charges seemed to be an unfortunate error. “Seems like there was a misunderstanding,” the spokeswoman said via email. “Our policy remains as previously shared with you.” She added, “We will continue to offer fee waivers based on the specified parameters.”

Martin Semeraro, 36, called Frontier Airlines on Saturday to cancel round-trip tickets for him, his wife and their three kids. The Rhode Island family was planning to take their annual trip to Naples, Fla., to visit Semeraro’s parents, who live in a retirement community there, but chose to cancel their trip. His parents had expressed concern about the coronavirus, and the risk of it spreading.

Here is what the customers said on Twitter
TWTR,
-4.31%

about the fees:

When Semararo managed to speak with a Frontier customer-service representative, he was told he’d be on the hook for cancellation fees, he said. “He put me on hold for a few minutes and then came back on and said, ‘All right, it’s going to be $119 a ticket to cancel your ticket,’” Semeraro, who works in information technology for an insurance company, said.

MarketWatch also called the airline’s customer support hot line and was told by a customer-service representative that the airline was, in fact, charging fees for changing or cancelling flights. If a customer changes flights on Frontier, they are subject to differences in fare. Cancellations must use their travel credit within 90 days. Sixty days or more before departure, changes are free.

Frontier Airlines typically charges $119 per ticket to cancel or change a flight 13 or fewer days prior to departure. Between 14 and 59 days before departure, passengers must pay $79 (or $49 if the ticket was purchased before Sept. 13, 2019) to change or to cancel. Customers can get a fully refundable ticket on Frontier by purchasing the airline’s “the works” bundle with their ticket.

Semararo said his family is waiting a few more days before paying the fees. He said the experience has made him hesitant about booking a flight with the low-cost carrier in the future. “I have a certain expectation with how they treat their customers and how they manage their customer service, and they’ve definitely failed on this one big time,” he told MarketWatch earlier Sunday.

(This story was updated with a response from Frontier Airlines.)



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International Economic Week In Review For 3/2-3/6


Investment thesis: the major international markets are still correction. While some may be forming bottoms, it’s still way too early to think about taking a position in any region.

On Monday, the OECD lowered its global growth estimatedue to the coronavirus (emphasis added):

On the assumption that the epidemic peaks in China in the first quarter of 2020 and outbreaks in other countries prove mild and contained, global growth could be lowered by around ½ percentage point this year relative to that expected in the November 2019 Economic Outlook.

A longer lasting and more intensive coronavirus outbreak, spreading widely throughout the Asia-Pacific region, Europe and North America, would weaken prospects considerably. In this event, global growth could drop to 1½ per cent in 2020, half the rate projected prior to the virus outbreak.

Here’s a graphic of the OECD’s projections:Obviously, these are estimates. But the point is taken: growth will take a hit.

The latest manufacturing PMIs from Markit are mixed.

  • China’s PMI dropped from 51.1-40. However, don’t be surprised to see that number boomerang over the coming months as China restarts its economy.
  • Japan’s PMI dropped from 48.8-47.8. New orders, production, and employment all decreased.
  • Taiwan’s PMI dropped from 51.8-49.9, entering contraction territory. New orders, production, and employment all declined.
  • Indonesia’s PMI rose to 51.9, but only due to the strength of domestic orders. Export orders declined.
  • South Korea’s PMI fell from 49.8-48.7, with production and export orders declining.
  • The EU’s manufacturing sector is still contracting; it rose from 47.9 to 49.2 but is still below 50.
  • The UK continues to get a post-Johnson victory boost; its PMI is 51.7 thanks to a rise in domestic orders.

Most of this data is pre-coronavirus.

The service data was mixed.

  • China’s service PMI dropped from 51.8-26.2, with new orders, production, and employment all dropping. As with the manufacturing data, don’t be surprised to see this number significantly reverse course over the next few months.
  • Japan’s service PMI dropped from 51-46.8, largely due to a drop in new orders
  • The EU service sector continued to expand; the service PMI increased .1 to 52.6. New domestic orders and employment continued to increase.

The RBA lowered Australian rates 25 basis points to 50 BP. Here are the key paragraphs from their release:

The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected. Prior to the outbreak, there were signs that the slowdown in the global economy that started in 2018 was coming to an end. It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path. Policy measures have been announced in several countries, including China, which will help support growth. Inflation remains low almost everywhere and unemployment rates are at multi-decade lows in many countries. ….

The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending. As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected. Given the evolving situation, it is difficult to predict how large and long-lasting the effect will be. Once the coronavirus is contained, the Australian economy is expected to return to an improving trend. This outlook is supported by the low level of interest rates, high levels of spending on infrastructure, the lower exchange rate, a positive outlook for the resources sector and expected recoveries in residential construction and household consumption. The Australian Government has also indicated that it will assist areas of the economy most affected by the coronavirus.

The bank’s statements and predictions are in line with what other central banks and international organizations are saying: the domestic economy will take a short-term hit, the length of the hit is unknown, but the expectation is that the economic trajectory will return to growth after an indeterminate period of time.

The Bank of Canada lowered rates 50 basis points to 1.25%. Here are the key points from the policy announcement (emphasis added):

Before the outbreak, the global economy was showing signs of stabilizing, as the Bank had projected in its January Monetary Policy Report (MPR). However, COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted. This has pulled down commodity prices and the Canadian dollar has depreciated. …

It is becoming clear that the first quarter of 2020 will be weaker than the Bank had expected. The drop in Canada’s terms of trade, if sustained, will weigh on income growth. Meanwhile, business investment does not appear to be recovering as was expected following positive trade policy developments. In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity in the first quarter.

These observations are hardly shocking.

Let’s turn to this week’s performance table:

With the exception of the SPY, all international markets were off; it’s only a matter of degree. Starting at the bottom, Brazil, Russia, and India were some of the biggest losers, as was the entire Latin American region. Australia – which is dependent on China – also dropped as did Canada, which is more export-dependent. Other markets were actually a bit better off than you’d think given this week’s headlines.The charts are all still bearish. Some are trying to form bottoms while others are still moving lower. No region stands out, however, as a place to make a new trade just yet.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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