I was on RT Boom/Bust yesterday with Erin Ade, and got to talk about:

  • Apple
  • The “Tech Bubble”
  • The “Bond Bubble”
  • Different sectors of the stock market, and their prospects.

This was the first half of the interview.  If they run the second half, I will post it.  Note my modest confusion on the tech bubble as I forget the second thing and try to recall it, while vamping for time.  I don’t often glitch under pressure, but this was a bad time to have a foggy memory (on something that I wrote myself).  Sigh. :(

Full disclosure: positions in sectors mentioned, but no positions in any specific securities mentioned

Photo Credit: Eddy Van 3000

Photo Credit: Eddy Van 3000

This piece is an experiment.  A few readers have asked me to do explanations of simple things in the markets, and this piece is an attempt to do so.  Comments are appreciated.  This comes from a letter from a friend of mine:

I hope I don’t bother you with my questions.  I thought I understood bid/ask but now I’m not sure.

For example FCAU has a spread of 2 cents.  That I understand – 15.48 (bid) – that’s the offer to buy and 15.50 (ask) – that’s the offer to sell.

Here’s where I’m confused.  How is it possible that those numbers could more than $1 apart? EGAS 9.95 and 11.13.  I don’t understand.  Is the volume just so low?  And last price is 10.10 which is neither the ask nor bid price.  Can you please explain?

You have the basic idea of the bid and ask right.  There is almost always a spread between the bid and the ask.  There can be occasional exceptions where a special order is placed, such as an “all or none” order, where the other side of the trade would not want to transact the full amount, even though the bid and ask price are the same.  The prices might match, but the conditions/quantities don’t match.

You ask why bid/ask spreads can be wide.  I assume that when you say wide, you mean in percentage terms.  Here the main reason: many of the shares are held by investors with a long time horizon, who have little inclination to trade.  Here is a secondary reason: the value of the investment is more uncertain than many alternative investments.  I believe these reasons sum up why bid/ask spreads are wide or narrow.  Let me describe each one.

1) Few shares or bonds are available to trade

Many stocks have a group of dominant investors that own the stock for the longish haul.  The fewer the shares/bonds that are available to trade, the more uncertainty exists in where the assets should trade, because of the illiquidity.

Because few shares are available to trade, price moves can be violent, because it only takes a small order to move the price.  Woe betide the person who foolishly places a large market order, looking to buy or sell at the best price possible.  I did that once on a microcap stock (the stock of a very small company), and ended up doubling the price of the stock as my order was fully filled, only to see the price fall right back to where it was.  Painful lesson!

As a result, those that make markets, or  buy and sell stocks tend to be more cautious in setting prices to buy and sell illiquid securities because of the difficulty of trading, and the problem of moving the market away from you with a large order.

I’ve had that problem as well, both with small cap stocks, and institutionally trading illiquid bonds.  You can’t go in boldly, demanding more liquidity than the market typically offers.  If you are buying, you will scare the sellers, and the ask will rise.  If you are selling, you will scare the buyers, and the bid will fall.  There is a logical reason for this: why would someone come into a market like a madman trying to fit 10 pounds into a 5-pound bag?  Perhaps they know something that everyone else does not.  And thus the market runs away, whether they really do know something or not.

In some ways, my rookie errors with small cap stocks helped me become a very good illiquid bond trader.  For most bonds, there is no bid or ask.  Some bonds trade once a week, month, or year… indicative levels are given, maybe, but you navigate in a fog, and so you begin sounding out the likely market to get some concept of where a trade might be done.  Then negotiation starts… and you can read about more this in my “Education of a Corporate Bond Manager” series… I know most here want to read about stocks, so…

2) Uncertainty of the value of an asset

Imagine a stock that may go into default, or it may not.  Or, think of a promoted penny stock, because most of them are in danger of default or a dilutive stock offering.  Someone looking to buy or sell has little to guide them from a fundamental standpoint — it is only a betting game, with volatile prices in the short run.  Market makers, if any, and buyers and sellers will be cautious, because they have little idea of what may be coming around the corner, whether it is a big news event, or a crazy trader driving the stock price a lot higher or lower.

For ordinary stocks, large enough, with legitimate earnings and somewhat predictable prospects, the size of the bid-ask spread reflects the short-run volatility of price.  In general, lower volatility stocks have low bid-ask spreads.  Even with market makers, they set their bid-ask spreads to a level that facilitates trade, but not so tight that if the stock gets moving, they start taking significant losses.  And, as I experienced as a bond trader, if news hits in the middle of a trade, the trade is dead.  You will have to negotiate afresh when the news is digested.

As for the “Last Price”

The last price reflects the last trade, and in this era where so much trading occurs off of the exchanges, the bid and ask that you may see may not reflect the true state of the market.  Even if it does reflect the true state of the market, there are some order types that are flexible with respect to price (discretionary orders) or quantity (reserve orders).  Trades should not occur outside of the bid-ask spread, but many trades happen without a market order hitting the posted bid or lifting the posted ask.

And though this is supposed to be simple, the simple truth is that much trading is far more complex today than when I started in this business.  I disguise my trades to avoid alarming buyers or sellers, and most institutional investors do the same, breaking big trades into many small ones, and hiding the true size of what they are doing.

Thus, I encourage all to be careful in trading.  Until you know how much capacity for trading a given asset has, start small, and adjust.

All for now, until the next time when I do more “simple stuff” at Aleph Blog.

Photo Credit: Roscoe Ellis

Photo Credit: Roscoe Ellis

I was reading an occasional blast email from my friend Tom Brakke, when he mentioned a free publication from Redington, a UK asset management firm that employs actuaries, among others. I was very impressed with what I read in the 32-page publication, and highly recommend it to those who select investment managers or create asset allocations, subject to some caveats that I will list later in this article.

In the UK, actuaries are trained to a higher degree to deal with investments than they are in the US. The Society of Actuaries could learn a lot from the Institute of Actuaries in that regard. As a former Fellow in the Society of Actuaries, I was in the vanguard of those trying to apply actuarial principles to risk management, both when I managed risks for insurance companies, worked for non-insurance organizations, and manage money for upper middle class individuals and small institutions. Redington’s thoughts are very much like mine in most ways. As I see it, the best things about their investment reasoning are:

  • Risk management must be both quantitative and qualitative.
  • Risk is measured relative to client needs and thus the risk of an investment is different for clients with different needs.  Universal measures of risk like Sharpe ratios, beta and standard deviation of asset returns are generally inferior measures of risk.  (DM: But they allow the academics to publish!  That’s why they exist!  Please fire consultants that use them.)
  • Risk control methods must be implemented by clients, and not countermanded if they want the risk control to work.
  • Shorting requires greater certainty than going long (DM: or going levered long).
  • Margin of safety is paramount in investing.
  • Risk control is more important when things are going well.
  • It is better to think of alternatives in terms of the specific risks that they pose, and likely future compensation, rather than look at track records.
  • Illiquidity should be taken on with caution, and with more than enough compensation for the loss of flexibility in future asset allocation decisions and cash flow needs.
  • Don’t merely avoid risk, but take risks where there is more than fair compensation for the risks undertaken.
  • And more… read the 32-page publication from Redington if you are interested.  You will have to register for emails if you do so, but they seem to be a classy firm that would honor a future unsubscribe request.  Me?  I’m looking forward to the next missive.

Now, here are a few places where I differ with them:

Caveats

  • Aside from pacifying clients with lower volatility, selling puts and setting stop-losses will probably lower returns for investors with long liabilities to fund, who can bear the added volatility.  Better to try to educate the client that they are likely leaving money on the table.  (An aside: selling short-duration at-the-money puts makes money on average, and the opposite for buying them.  Investors with long funding needs could dedicate 1% of their assets to that when the payment to do so is high — it’s another way of profiting from offering insurance in of for a crisis.)
  • Risk parity strategies are overrated (my arguments against it here: one, two).
  • I think that reducing allocations to risky assets when volatility gets high is the wrong way to do it.  Once volatility is high, most of the time the disaster has already happened.  If risky asset valuations show that the market is offering you significant deals, take the deals, even if volatility is high.  If volatility is high and valuations indicate that your opportunities are average to poor at best, yeah, get out if you can.  But focus on valuations relative to the risk of significant loss.
  • In general, many of their asset class articles give you a good taste of the issues at hand, but I would have preferred more depth at the cost of a longer publication.

But aside from those caveats, the publication is highly recommended.  Enjoy!

At Abnormal Returns, over the weekend, Tadas Viskanta featured a free article from Credit Suisse called the Credit Suisse Global Investment Returns Yearbook 2015.  It featured articles on whether the returns on industries as a whole mean-revert or have momentum, whether there is a valuation effect on industry returns, “social responsibility” in investing, and the existence of equity discount rate for the market as a whole.

There are no surprises in the articles — it is all “dog bites man.”  They find that:

  • Industry returns exhibit momentum
  • There is a valuation component in industry returns
  • Socially responsible investing doesn’t necessarily produce or miss excess returns
  • There is an overall equity discount rate, which is levered about 20-25 times, i.e., a 1% increase in the rate lowers valuations by 20-25%.

The first two are well-known for individual stocks, so it isn’t surprising that it happens at the industry level.  The third one has been written about ad nauseam, with many conflicting opinions, so that there is little effect is no big surprise.  The last one resembles research I saw in the mid-90s, where the effect of changes in real interest rates has about that impact on stocks.  Again, nothing new — which is as it should be.

But now some more on industry returns.  They found that industry return momentum was significant.  Industries that did well one year were likely to do well in the next year.  The second finding was that industries with cheap valuations also tended to do well, but it was a smaller effect.

So, using one-year price returns as my momentum variable and book-to-market as a valuation variable (both suggested in the article), I divided industries for companies trading in the US into quintiles (also suggested in the article) for momentum and valuation.  (Each quintile has roughly 20% of the total market cap.)  Here is the result:

IMVC

 

Low valuations are at the right, high at the left.  Low momentum at the top, high momentum at the bottom.  Ideally by this method, you would look for industries in the southeast corner.

To me, Agriculture, Information Technology, Security, Waste, Some Retail, and Some Transportation look interesting.  One in the far southeast that is not so interesting for me is P&C Insurance.  Yes, it has done well, and compared to other industries, it is cheap.  But industry surplus has grown significantly, leading to more competition, and sagging premium rates.  Probably not a great time to make new commitments there.

Anyway, the above table should print out nicely on two sheets of letter-sized paper.  Not that it would be a substitute for your own due diligence, but perhaps it could start a few ideas going.  All for now.

Photo Credit: NoHoDamon

Photo Credit: NoHoDamon

Brian Lund recently put up a post called 5 Reasons You Deserve to Lose Every Penny in the Stock Market.  Though I don’t endorse everything in his article, I think it is worth a read.  I’m going to tackle the same question from a broader perspective, and write a different article.  As we often say, “It takes two to make a market,” so feel free to compare our views.

I have one dozen reasons, many of which are related.  I do them separately, because I think it reveals more than grouping them into fewer categories.  Here we go:

1) Arrive at the wrong time

When does the average person show up to invest?  Is it when assets are cheap or expensive?

The average person shows up when there has been a lot of news about how well an asset class has been doing.  It could be stocks, housing, or any well-known asset.  Typically the media trumpets the wisdom of those that previously invested, and suggests that there is more money to be made.

It can get as ridiculous as articles that suggest that everyone could be rich if they just bought the favored asset.  Think for a moment.  If holding the favored asset conferred wealth, why should anyone sell it to you?  Homebuilders would hang onto their inventories. Companies would not go public — they would hang onto their own stock and not sell it to you.

I am reminded of some of my cousins who decided to plow money into dot-com stocks in late 1999.  Did they get to the party early?  No, late.  Very late.  And so it is with most people who think there is easy money to be made in markets — they get to the party after stock prices have been bid up.  They put in the top.

2) Leave at the wrong time

This is the flip side of point 1.  If I had a dollar for every time someone said to me in 1987, 2002 or 2009 “I am never touching stocks ever again,” I could buy a very nice dinner for my wife and me.  Average people sell in disappointment thinking that they are protecting the value of their assets.  In reality, they lock in a large loss.

There’s a saying that the right trade is the one that hurts the most.  Giving into greed or fear is emotionally satisfying.  Resisting trends and losing some money in the short run is more difficult to do, even if the trade ultimately ends up being profitable.  Maintaining exposure to stocks at all times means you ride a roller coaster, but it also means that you earn the long-term returns that accrue to stocks, which market timers rarely do.

You can read some of my older pieces on how investors earn less on average than buy-and-hold investors do.  Here’s one on how investors in the S&P 500 ETF [SPY], trail buy-and-hold returns by 7%/year.  Ouch!  That comes from buying and selling at the wrong times.  ETFs may lower expenses, but they also make it easy for people to trade at the wrong times.

3) Chase the hot sector/industry

The lure of easy money brings out the worst in people.  Whether it is tech stocks in 1987, dot-coms in 1999, or housing-related assets in 2007, there will always be people who think that the current industry fad will be a one-way ticket to riches.  There is psychological satisfaction to be had by buying what is popular.  Everyone wants to be one of the “cool kids.”  It’s a pity that that is not a good way to make money.  That brings up point 4:

4) Ignore Valuations

The returns you get are a product of the difference in the entry and exit valuations, and the change in the value of the factor used to measure valuation, whether that is earnings, cash flow from operations, EBITDA, free cash flow, sales, book, etc.  Buying cheap aids overall returns if you have the correct estimate of future value.

This is more than a stock market idea — it applies to private equity, and the purchase of capital assets in a business.  The cheaper you can source an asset, the better the ultimate return.

Ignoring valuations is most common with hot sectors or industries, and with growth stocks.  The more you pay for the future, the harder it is to earn a strong return as the stock hopefully grows into the valuation.

5) Not think like a businessman, or treat it like a business

Investing should involve asking questions about whether the economic decisions are being made largely right by those that manage the company or debts in question.  This is not knowledge that everyone has immediately, but it develops with experience.  Thus you start by analyzing business situations that you do understand, while expanding your knowledge of new areas near your existing knowledge.

There is always more to learn, and a good investor is typically a lifelong learner.  You’d be surprised how concepts in one industry or market get mirrored in other industries, but with different names.  One from my experience: Asset managers, actuaries and bankers often do the same things, or close to the same things, but the terminology differs.  Or, there are different ways of enhancing credit quality in different industries.  Understanding different perspectives enriches your understanding of business.  The end goal is to be able to think like an intelligent business manager who understands investing, so that you can say along with Buffett:

I am a better investor because I am a businessman, and a better businessman because I am an investor.

(Note: this often gets misquoted because Forbes got mixed up at some point, where they think it is: I am a better investor because I am a businessman, and a better businessman because I am no investor.)  Good investment knowledge feeds on itself.  Little of it is difficult, but learn and learn until you can ask competent questions about investing.

After all, you are investing money.  Should that be easy and require no learning?  If so, any fool could do it, but my experience is that those who don’t learn in advance of investing tend to get fleeced.

6) Not diversify enough

The main objective here is that you need to only invest what you can afford to lose.  The main reason for this is that you have to be calm and rational in all the decisions you make.  If you need the money for another purpose aside from investing, you won’t be capable of making those decisions well if in a bear market you find yourself forced to sell in order to protect what you have.

But this applies to risky assets as well.  Diversification is inverse to knowledge.  The more you genuinely know about an investment, the larger your positions can be.  That said I make mistakes, as other people do.  How much of a loss can you take on an individual investment before you feel crippled, and lose confidence in your abilities.

In the 25+ years I have been investing, I have taken significant losses about ten times.  I felt really stupid after each one.  But if you take my ten best investments over that same period, they pay for all of the losses I have ever had, leaving the smaller gains as my total gains.  As a result, my losses never inhibited me from continuing in investing; they were just a part of the price of getting the gains.

Temporary Conclusion

I have six more to go, and since this article is already too long, they will have to go in part 2.  For now, remember the main points are to structure your investing affairs so that you can think rationally and analyze business opportunities without panic or greed interfering.

Photo Credit: Thibaut Chéron Photographies

Photo Credit: Thibaut Chéron Photographies

I wish I could tell you that it was easy for me to stop making macroeconomic forecasts, once I set out to become a value investor.  It’s difficult to get rid of convictions, especially if they are simple ones, such as which way will interest rates go?

In the early-to-mid ’90s, many were convinced that interest rates had no way to go but up.  A few mortgage REITs designed themselves around that idea.  Fortunately, I arrived at the party late, after their investments that implicitly required interest rates to rise soon, fell dramatically in price.  I bought a basket of them for less than book value, excluding the value of taxes that could be sheltered in a reverse merger.

For some time, the stocks continued to fall, though not rapidly.  I became familiar with what it was like to go through coercive rights offerings from cash-hungry companies in trouble.  Bankruptcy was not impossible… and I burned a lot of mental bandwidth on these.  The rights offerings weren’t really good things in themselves, but they led me to buy in at a good time.  Fortunately I had slack capital to deploy.  That may have taught me the wrong lesson on averaging down, as we will see later.  As it was, I ended up making money on these, though less than the market, and with a lot of Sturm und Drang.

That leads me to my main topic of the era: Caldor.  Caldor was a discount retailer that was active in the Northeast, but nationally was a poor third to Walmart and KMart.  It came up with the bright idea of expanding the number of stores it had in the mid-90s without raising capital.  It even turned down an opportunity to float junk bonds.  I remember noting that the leverage seemed high.

What I didn’t recognize that the cost of avoiding issuing equity or longer-term debt was greater reliance on short-term debt from factors — short-term lenders that had a priority claim on inventory.  It would eventually prove to be a fatal error, and one that an asset-liability manager should have known well — never finance a long term asset with short-term debt.  It seems like a cost savings, but it raises the likelihood of insolvency significantly.

Still, it seemed very cheap, and one of my favorite value investors, Michael Price, owned a little less than 10% of the common stock.  So I bought some, and averaged down three times before the bankruptcy, and one time afterwards, until I learned Michael Price was selling his stake, and when he did so, he did it without any thought of what it would do to the stock price.

Now for two counterfactuals: Caldor could have perhaps merged with Bradlee’s, closed their worst stores, refinanced their debt, issued equity, and tried to be a northeast regional retail player.  It didn’t do that.

The investor relations guy could have given a more understanding answer when he was asked whether Caldor was having any difficulties with credit lines from their factors.  Instead, he was rude and dismissive to the questioning analyst.  What was the result?  The factors blinked and pulled their lines, and Caldor went into bankruptcy.

What were my lessons from this episode?

  • Don’t average down more than once, and only do so limitedly, without a significant analysis.  This is where my portfolio rule seven came from.
  • Don’t engage in hero worship, and have initial distrust for single large investors until they prove to be fair to all outside passive minority investors.
  • Avoid overly indebted companies.  Avoid asset liability mismatches.  Portfolio rule three would have helped me here.
  • Analyze whether management has a decent strategy, particularly when they are up against stronger competition.  The broader understanding of portfolio rule six would have steered me clear.
  • Impose a diversification limit.  Even though I concentrate positions and industries in my investing, I still have limits.  That’s another part of rule seven, which limits me from getting too certain.

The result was my largest loss, and I would not lose more on any single investment again until 2008 — I’ll get to that one later.  It was my largest loss as a fraction of my net worth ever — after taxes, it was about 4%.  As a fraction of my liquid net worth at the time, more like 10%.  Ouch.

So, what did I do to memorialize this?  Big losses should always be memorialized.  I taught my (then small) kids to say “Caldor” to me when I talked too much about investing.  They thought it was kind of fun, and I would thank them for it, while grimacing.

But that helped.  Remember, value investing is first about safety, and second about cheapness.  Cheapness rarely makes something safe enough on its own, so analyze balance sheets, strategy, use of cash flow, etc.  This is not to say that I did not make any more errors, but this one reduced the size and frequency.

That said, there will be more “fun” chapters to share in this series, because we always learn more from errors than successes.

Here is the second part of my interview on RT Boom/Bust. It was recorded while the FOMC was releasing its statement, so I had no idea at that time as to what the announcement had been.

The interview covers my view of Apple (not one of my strong points), Fed Policy, and what should value investors do in this low interest rate environment. Note that not all of my opinions are strong ones, and that in my opinion is a good thing. Often the best opinions are not controversial.

If you are interested in these topics, or listening to me, then please enjoy the above video. My segment is about seven minutes long.

Photo Credit: Storm Crypt || Ah, to be in Zurich, and enjoy the additional purchasing power of the Franc

Photo Credit: Storm Crypt || Trusting the Swiss National Bank, Really?

Significant currency brokers relied on the Swiss National Bank to keep its currency peg in place. Now some of them are insolvent, and many of their clients also. Should they be surprised? Currency pegs put into place for political reasons rarely hold up, and this has happened in Switzerland in the past.

On thing I learned early in my career is that you never bet the firm. You never allow there to be a single point where a change brings failure.

You don’t rely on the kindness of strangers. In markets, always ask “What are the motives of the other players?” As an example, think of all of the people who lost money on auction rate preferred securities. There was no guarantee that auctions would always succeed, or that if one failed, the sponsor would take up the slack. No, when they failed, those that relied on the implicit idea that “auction rate preferreds are a safe reliable way to earn extra money in the short run” got hosed.

That’s why I say be wary, particularly where politically motivated entities like Central Banks are involved.  Are you certain that the Fed will tighten this year, and that interest rates will rise?  Do be so certain; people have been betting on that for some time, and the Fed is more than happy to let things slide until something forces their hand, or they think the risks of a move are minuscule.  Though we are at record lows for the 30-year Treasury, rates could go lower still.

Credit: Bloomberg

Credit: Bloomberg

Who knows?  Maybe rates go low enough that someone relying on them to remain above a certain level gets forced to buy into a high market already, and put in the top for prices, and bottom for yields.

On the other hand, there are some that argue that the Fed can’t raise rates because then the US Government would have problems financing its deficit if interest rates rose.  Maybe, but I wouldn’t rely on that, either.  I’ve been long long Treasuries for quite some time, but we are getting near the points where Hoisington and Schilling have suggested the trade might be over. Add onto that that banks may finally be starting to lend, and maybe indeed, we are near the bottom for interest rates. I just would not rely on it and make a one way bet.

In my next segment on “Learning from the Past,” I’ll go over my first really major loss where I traveled on the coattails of a famous value investor and lost royally. The point is: don’t rely on the kindness of strangers. Analyze where things can go wrong, and where other parties may have a different view than you do. Why are you smarter than they are? If they are in a position of power, what makes you think they will use it in your favor, rather than act in their own interests? As an example, just because the banks were bailed out last time does not mean that it will happen next time. The players and politics could be vastly different, with policymakers finally realizing that they only have to protect depositors, and nothing more.

So be wary.  More next time, and I should be returning to a more regular blogging schedule once again.  My extracurricular project nears completion.  More on that later also.

Photo Credit: Alon

Photo Credit: Alon

There is always a reason to worry, and always enough time to panic.

Look over there, behind that bush: interest rates are rising. In Europe and China, deflation is threatening. The geopolitical situation is in many ways tense over Russia and Middle East issues. Japan is a mess. Emerging markets will get hit when the Fed starts to tighten.

I could go on, and talk about the longer term demographic problems that we face, and other aspects of lousy government policy, but it would get too long. The point is, there are things that you can worry about. But what should you do?

For many people, worry paralyzes. If there are significant potential problems, they won’t invest, or they will keep their investments very simple and safe. They may fall prey to those who scam by offering “safety” though gold, guns, food storage, life insurance products, etc. Is there a better way to avoid worry?

The first way to avoid worry is to realize that more things can go wrong than do go wrong. Many of the things you might worry about will not happen. Second, even when things do go wrong, the market prices often reflect those possibilities, so the markets may not react badly. Third, the markets have endured many crises in the past and have come back from those crises. Fourth, in the worst crises you can imagine, it will not matter what you do if those take place — you will lose a lot, but so will everyone else. If no strategy can work in the worst problems, you should spend your time praying rather than worrying.

Some might say to me, “But I don’t want to lose a lot of money! I’m relying on it for my retirement (or whatever).” If that is your problem, the answer is simple — invest less in risk assets. Give up some potential return so that you can sleep at night. That has been my advice to a bunch of pastors who generally don’t understand the markets at all. We offer them blended portfolios of risky and safe assets ranging from low volatility to the volatility level of the stock market. I tell them to look at what the blended portfolios have lost in 2008, and size the risk of their holdings to what they can live with in terms of risk if they had to liquidate at a bad time. If they are still squeamish, I tell them to take the risk level down another notch.

There is a risk to not taking enough risk, and that will be the point of part 2, but it is better for the squeamish to implement a sub-optimal plan than no plan. It is also better for the squeamish to implement a sub-optimal plan than a plan that they can’t maintain, because they get too scared.

Solutions have to be real-world to meet people where they are. After that, maybe we can try to teach people not to worry, but human nature is difficult to change.

PS — for any that might say that they are worried that they aren’t going to earn enough to be able to retire or stay comfortably retired, part 2 will have something to say there as well.