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Tag: bank stocks

  • Canadian banks earnings reports – MoneySense

    Canadian banks earnings reports – MoneySense

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    While results outside the credit provisions looked better than expected, it wasn’t enough to outweigh concerns about the bank’s loan book, said Scotiabank analyst Meny Grauman in a note. “After a big credit-focused miss in Q2, the market was laser focused on credit heading into Q3 reporting, and it is unfortunate that this is where the issues are once again,” he said. “The bottom line is that fears that BMO is in fact the outlier of this credit cycle will continue to weigh on the shares.”

    Rising provisions drag on Scotiabank results, but bank sees levelling of stress

    The Bank of Nova Scotia saw third-quarter profits fall compared with a year ago as it boosted its provisions for bad loans, even as the bank says it’s seeing some levelling out of the financial stress on Canadian consumers. The bank reported Tuesday it had $1.05 billion set aside for bad loans in the quarter, up from $819 million a year earlier, but increasing only slightly from the $1.01 billion last quarter. The amount of impaired loans, the kind the bank doesn’t reasonably expect full repayment on, actually fell for Canadian banking in the third quarter compared with the second, to $338 million from $399 million.

    “I continue to be impressed by how resilient the Canadian consumer has been through this period, the trade-offs that they continue to make,” said Phil Thomas, chief risk officer at Scotiabank. The trend is clearly coming through on variable-rate mortgages, he said, which have also started to benefit from the Bank of Canada starting to cut rates. Scotia is also seeing a levelling-off in its auto loans, an area it’s been signalling as stressed for about a year, said Thomas.
    “I was really encouraged this quarter to see we’re finally stable as it relates to net write offs in that portfolio,” he said. “One quarter is not a trend, but I’m encouraged by what I’m seeing this quarter. And even as I look into next quarter, I see stability in these portfolios moving forward.”

    Scotiabank has a much smaller credit card portfolio than some other Canadian banks, but its unsecured credit line trend seems to no longer be getting worse, Thomas said. “I am super encouraged by the fact that this quarter, the levels of delinquency or any stress seem to be levelling off.”

    While stabilizing, higher loan loss provisions did weigh on profits that amounted to $1.91 billion or $1.41 per diluted share for the quarter ended July 31 compared with a profit of $2.19 billion or $1.70 per diluted share a year ago. On an adjusted basis, Scotiabank says it earned $1.63 per diluted share, down from an adjusted profit of $1.72 per diluted share in the same quarter last year. Analysts on average had expected Scotiabank to earn an adjusted profit of $1.62 per share for the quarter, according to to LSEG Data & Analytics. Revenue totalled $8.36 billion, up from $8.07 billion in the same quarter last year.

    Earlier in August, Scotiabank announced it would pay about USD$2.8 billion for a 14.9% stake in the U.S. bank KeyCorp in two stages. Some analysts have worried about the bank possibly devoting lots of cash to buy even more of the bank, but chief executive Scott Thomson said Tuesday that the deal was about getting increased exposure to the U.S. at a good price. “Our investment in KeyCorp represents a low cost low-risk approach to deploying capital in the U.S. banking market at a time when valuations are favourable and as the regulatory and competitive environment evolves.”

    TD Bank Group reports profits down 22% on anti-money laundering hit.

    TD Bank Group’s second-quarter profit fell 22% from last year as it booked costs related to a high-profile failure of its U.S. anti-money laundering program. The bank had warned of the $615-million initial charge it was taking in connection with its talks with U.S. regulators, allowing analysts to adjust projections that the bank then handily beat. “It was a strong quarter for TD with all of our businesses outperforming expectations,” said chief executive Bharat Masrani on an earnings call Thursday, after reiterating the bank’s mea culpa on its anti-money laundering controls. )

    Read the full article about TD’s earning report: Why is TD’s profit down?

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    The Canadian Press

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  • RBC earnings: A look at the bank’s Q2 financials – MoneySense

    RBC earnings: A look at the bank’s Q2 financials – MoneySense

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    The bank said Thursday it will now pay a quarterly dividend of $1.42 per share, an increase of four cents. It also said it plans to buy back up to 30 million of its shares. 

    The moves came as RBC said it earned $3.95 billion or $2.74 per diluted share for the quarter ended April 30, up from $3.68 billion or $2.60 per diluted share a year earlier, helped in part by record capital markets revenue.

    “This quarter, we saw strong growth across diversified revenue streams,” said chief executive Dave McKay on an earnings call.

    He said the bank’s capital generation means it has options ahead for growth, including potential acquisitions, even as the bank returns more money to shareholders.

    “This enormous capital that we are generating gives us significant strategic flexibility inorganically.”

    The bank also has a wide range of growth options within the bank now, including making the most of its $13.5-billion HSBC Canada acquisition.

    End of uncertainty for former HSBC employees

    The roughly 4,500 employees RBC took on with the acquisition are now free from the uncertainty around the deal, and the barriers it posed to bringing on clients, he said.

    “They’ve been on the defence for 18 months, and now we’re on the offence and you can see the excitement in their eyes to get back,” said McKay.

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    The Canadian Press

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  • Why is TD’s profit down? – MoneySense

    Why is TD’s profit down? – MoneySense

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    TD’s response to money laundering questions

    Despite repeated questioning from analysts, the bank didn’t provide any new information such as timelines or expected penalties on the multiple investigations it faces in the U.S., but Masrani said the bank is doing all it can to help wrap them up.

    TD’s earnings highlights

    News from TD’s earnings call on Thursday, May 23.

    • Toronto-Dominion Bank (TD/TSX): Net income of $2.56 billion ($1.35 per diluted share), down from $3.31 billion or $1.69 per diluted share in the same quarter last year. It earned $2.04 per diluted share ($1.91 per a year earlier). Also, revenue came in at $13.82 billion, and well above the average analyst estimate of $1.85 per share.

    “We have freely shared all information we have with the Department of Justice and other U.S. regulators, even when it demonstrated our weaknesses,” he said.

    Were it not for the money laundering issue, which the bank has already spent $500 million to fix, the quarter would have looked quite different. The bank reported net income of $2.56 billion or $1.35 per diluted share for the quarter ended April 30, down from $3.31 billion or $1.69 per diluted share in the same quarter last year.

    Adjusting for the charges and other outliers, TD said it earned $2.04 per diluted share, up from an adjusted profit of $1.91 per diluted share a year earlier.
    The results, helped by a 10% rise in revenue to $13.82 billion, were well above the average analyst estimate of $1.85 per share, according to data provided by LSEG Data & Analytics.

    Will it impact business? Or is it business as usual?

    “A big beat with a big asterisk,” wrote Scotiabank analyst Meny Grauman in a note. He said the results were mixed, given the beat was driven mostly by better-than-expected expenses and lower taxes, while the anti-money laundering issues still loom large. While the U.S. regulatory issues are a concern, the potential impact on business in its biggest growth market is a longer-term risk. Grauman said he didn’t see signs of that yet in the latest results. The possibility remains though.

    According to a report by the Wall Street Journal that TD hasn’t refuted, the U.S. Justice Department investigation is focused on how Chinese drug traffickers allegedly used TD to launder at least US$653 million and bribed TD employees to do so. 

    The seriousness of the allegations means the bank’s cumulative fines could easily hit $2 billion and TD could also face restrictions, including limits on its balance sheet growth, that could affect bank operations for years, National Bank analyst Gabriel Dechaine said when the report surfaced in early May. 
    The Globe and Mail reported late Wednesday that the bank also faces orders from Canada’s banking regulator to fix its risk controls, prompting analysts to question if the bank faces more global problems.

    Masrani pushed back against the report, saying the bank is in constant dialogue with regulators. “It is unfortunate that the report contains inaccuracies and misrepresents our normal course, business-as-usual interactions with Canadian regulators.

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    The Canadian Press

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  • Why bank stocks still have plenty of upside

    Why bank stocks still have plenty of upside

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    The Federal Reserve on Wednesday indicated that interest rates could be coming down this year. The KBW Nasdaq Bank Index rose more than 2% for the day and is up roughly 4% for the year to date.

    Michael Nagle/Bloomberg

    After a bruising 2023 in which bank stocks dropped on multiple occasions and struggled to sustain momentum, lenders’ shares have recovered ground in recent months.

    But bank stocks are treading lightly and may need further signals from the Federal Reserve that interest rate cuts are in the cards for this year to mount a serious rally.

    Henk Potts, market strategist at Barclays Private Bank, said he sees the realistic possibility for “the Fed to start cutting rates in June,” but “the path of policy still remains very data dependent.”

    The Fed on Wednesday balked at a March rate reduction but hinted cuts are coming. The KBW Nasdaq Bank Index rose more than 2% on the day. Still, while the index is up more than 20% from the lows of March 2023, when Signature Bank and Silicon Valley Bank each failed, the index is ahead just about 4% year to date.

    The regional bank downfalls — followed by the failure of First Republic Bank last May — intensified already heated competition for deposits, drove up funding costs and cast a long shadow over bank investor sentiment.

    The challenges came atop simmering credit quality concerns following the Fed’s efforts over the course of 2022 and early 2023 to drive up rates and counter inflation that surged in the wake of the pandemic and Russia’s invasion of Ukraine. Analysts cautioned that, historically, rising interest rates tended to dampen new investments and tilt the economy into a recession. Banks often suffer higher loan losses during downturns.

    Bank stocks last year hit their lowest levels since the immediate shocks of the pandemic in 2020.

    In recent months, however, federal data showed that inflation, while choppy, has come down dramatically. At a 3.2% annual rate in February, it was barely a third of the 2022 peak of 9.1%. The Fed appeared to tackle the worst of the inflation challenge while avoiding a recession and has paused its rate-hike campaign since last summer.

    Yet inflation remains above the Fed’s targeted 2% level and the job market, while strong, is not entirely rosy. Companies across technology, finance, media and other industries have announced layoffs early this year, and the unemployment rate ticked up to 3.9% in February from 3.7% the prior month. Job openings also declined.

    Robert Bolton, president of Iron Bay Capital, further noted that sizable portions of recent job gains involved lower-paying positions and second jobs.

    “There’s a lot of unknowns still,” said Bolton, explaining why many bank investors remain on the sidelines. “Inflation is not the one and only concern.”

    On Wednesday, Fed policymakers reiterated prior suggestions that rate cuts were on the horizon, perhaps as soon as this summer. While Fed officials kept their target rate in the 5.25% to 5.50% range, a majority of policy officials projected in a report that three rate cuts were possible this year. They next meet in May and then again in June.

    For the near term, however, “the path forward is uncertain,” Fed Chair Jerome Powell said during a press conference Wednesday. “We are strongly committed to returning inflation to our 2% objective.”

    With a higher-for-longer rate policy, the Fed could further cool the job market and the economy. This would help to further drive down inflation, but it would not bode well for loan demand or, potentially, banks’ credit quality, Bolton said.

    Employers collectively reported six-figure job gains every month last year — and again in January and February of this year. Employers added 275,000 jobs in February, according to the Labor Department. But the pace has slowed. The economy created 353,000 jobs during the first month of this year.

    The pace of economic growth has also eased. Gross domestic product advanced at an annual rate of 3.2% in the fourth quarter, down from third-quarter growth of 4.9%, according to the Commerce Department.

    “With the U.S. economy posting two consecutive quarters of 3%-plus GDP growth, recession calls have quieted down,” said Larry Adam, chief investment officer for Raymond James.

    But, he added, “there have been some warning signs over the last few months that suggest growth could slow. … While the labor market is on solid footing, cracks are forming.”

    The Atlanta Federal Reserve projected first-quarter GDP growth of just over 2%.

    Piper Sandler analyst Scott Siefers said that the latest weekly Fed data, covering the week that ended March 8 for the banking industry, showed deposit stability but loan growth of just 2% from a year earlier. Lending, he said, “is simply bobbing around a very weak level.”

    From an investor perspective, Siefers added, “as the year marches on, it becomes increasingly important for bank loan growth to inflect upward to meet existing expectations” for stronger interest income and profitability in 2024.

    “But realistically,” he added, “lower rates and better macro clarity may be necessary to make this a reality, reinforcing the notion of how heavily tied this group’s fortunes are to factors outside banks’ direct control.”

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    Jim Dobbs

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  • Why the community bank stock rally stalled

    Why the community bank stock rally stalled

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    Traders work on the floor of the New York Stock Exchange. Community bank stocks rallied at points in November, but they remain down for the year.

    Michael Nagle/Bloomberg

    Signs that interest rates may level off into 2024 — and ease pressure on both deposit costs and net interest margins — provided substantial boosts for community bank stocks at times in November. But the gains proved short-lived, and lenders’ shares finished the month where they’ve spent most of the year:depressed relative to the start of 2023 and compared to the market overall.

    The S&P U.S. BMI Banks index, composed largely of community lenders, closed Thursday, the final trading day of November, down 6% from the beginning of the year. The S&P 500, in contrast, was up 19%. 

    On the bullish front, the S&P U.S. BMI Banks index posted its biggest gain of the year by far in the week that ended Nov. 3. The index recorded a 9.4% gain. During that week, Federal Reserve policymakers announced they would leave their benchmark interest rate unchanged. After hiking rates 11 times since March 2022 to cool inflation, the Fed has paused on that front for several months now.

    The small bank index jumped another 6.9% for the week ended Nov. 17. During that stretch, the Labor Department reported that the U.S. inflation rate slowed to 3.2% in October. That was down substantially from its peak of 9.1% in June 2022. This indicated that the Fed’s aggressive rate actions had largely worked. Futures markets started to price in an end to the Fed’s campaign and even the potential for rate cuts next year.

    “More and more people are beating the rate-cut drum, maybe even a cut as soon as March,” said Robert Bolton, president of bank investor Iron Bay Capital. “That’s good news for community banks.”

    The response from investors on interest rate and inflation news signaled bullish undercurrents are simmering — for community banks and favorably priced small-cap stocks broadly.

    “We have seen a notable shift in underlying conditions — investors are sitting on record cash levels in money market funds, indexes are steadily outperforming, and strong institutional conviction is boding well for markets,” said Jeffrey O’Connor, head of market structure at Liquidnet, a trading and liquidity network.

    “As thoughts of rate pressure subsides, the forward thinking prospects for small caps have improved while valuations are enticing, attracting investors searching for opportunities to put to work capital before year-end,” he added.

    Lower rates could lead to lower deposit costs and stronger bank earnings in coming quarters after softer results for the third quarter. With rates elevated, banks have had to pay more in interest to depositors. This, by extension, has cut into NIMs — the profitability margin between the amount banks pay for deposits and earn in interest on the loans they make. Interest income is key for community banks, in particular, because they mostly rely on bread-and-butter lending activity, unlike more diverse megabanks that draw income from an array of business lines.

    “We do think NIMs bottom” out by the first quarter of 2024, Piper Sandler analyst Stephen Scouten said.

    And yet, despite the positives, confidence levels in small bank stocks remain lukewarm. Where’s the rub? “We expect that investors will need to be able to ring-fence the credit cycle before the group can move consistently higher,” Scouten added.

    Analysts are focusing on threats embedded in commercial real estate, given many small banks’ dependence on such lending. In particular, the beleaguered office sector remains a source of concern. As lease agreements expire, more companies are expected to further scale back on office space, due to remote work trends and high costs in major cities. This could leave landlords grappling with falling revenue; many could struggle to service their debts.

    The third-quarter CRE loan delinquency rate across the U.S. banking sector increased 21 basis points from the prior quarter to 1.03%, according to S&P Global Market Intelligence. That was the biggest sequential increase in at least five years and drove the delinquency rate above its early-pandemic high of 1.02% in the fourth quarter of 2020, the firm said.

    There are other soft spots, including areas of consumer credit such as auto loans. The delinquency ratio for car and truck loans reached 2.95% in the third quarter, marking an increase of 20 basis points from the prior quarter and a jump of 56 basis points from a year earlier, the S&P Global data show.

    But the potential for an improving rate environment could lay a foundation for sturdy credit quality and increased investor interest by early next year, Bolton said. He said that banks have robust reserves set aside to cover historically average loan losses, and many also have stout levels of excess capital that puts them in position to increase dividends, boot share buybacks and pursue acquisitions.

    “We’ve got a lot of upside,” Bolton said of community bank stocks.

    Investors generally are eager to put money to work in stocks, O’Connor said.

    “The tug of war of narratives between the bulls and bears that has persisted for much of 2023 looks better for the bulls heading into the final month of the year, particularly on the inflation and rates front,” he said.

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    Jim Dobbs

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  • Bond-market crash leaves big banks with $650 billion of unrealized losses as the ghost of SVB continues to haunt Wall Street

    Bond-market crash leaves big banks with $650 billion of unrealized losses as the ghost of SVB continues to haunt Wall Street

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    Bank of America shares have fallen 14% this year.Spencer Platt/Getty Images

    • Big banks are sitting on $650 billion of unrealized losses, Moody’s has estimated.

    • It’s a sign even Wall Street’s best-known names are feeling the heat from the Treasury-market rout.

    • Crashing bond prices sank Silicon Valley Bank earlier this year, and there may be more chaos to come.

    Crashing bond prices sank Silicon Valley Bank in March — and there’s reason to believe that what triggered the California lender’s collapse may be haunting Wall Street again.

    The brutal Treasury-market meltdown has hit some of the largest financial institutions hard, dragging down the share prices of big names such as Bank of America and fueling fears that the turmoil triggered by SVB’s bankruptcy may not be over just yet.

    Here’s everything you need to know about unrealized losses, including why they’re dragging on bank stocks and whether they could trigger another financial crisis.

    Unrealized losses

    Treasury bonds — debt instruments the government issues to fund its spending — have been on a nightmarish run since the onset of the pandemic, with investors fretting about rising interest rates and the long-term viability of the US’s massive deficit.

    BlackRock’s iShares 20+ Year Treasury fund, which tracks longer-duration debt prices, has plunged 48% since April 2020. Meanwhile, 10-year Treasury yields, which move in the opposite direction to prices, recently spiked above 5% for the first time in 16 years.

    As a result of that sell-off, some of the US’s biggest banks are now sitting on unrealized, or “paper,” losses worth hundreds of billions of dollars. That means the value of their bond holdings has plunged, but they’ve chosen to hold on rather than offload their investments.

    Moody’s estimated last month that US financial institutions had racked up $650 billion worth of paper losses on their portfolios by September 30 — up 15% from June 30. The ratings agency’s data still doesn’t account for a hellish October where the longer-term collapse in bond prices spiraled into one of the worst routs in market history.

    These “losses” are not the same as debt, however, which describes actual borrowings that need to be repaid.

    Bank of America is the big lender worst affected by the crash in bond prices, having disclosed a potential $130 billion hole in its balance sheet last month.

    The other “Big Four” banks — Citigroup, JPMorgan Chase, and Wells Fargo — have also racked up unrealized losses in the tens of billions, according to their second- and third-quarter earnings reports.

    Another SVB-style crisis?

    Silicon Valley Bank failed in March after disclosing a $1.8 billion loss on its own bond portfolio, triggering a run on deposits. Similarly, big banks’ huge unrealized losses are also sparking concern among Wall Street doom-mongers.

    “‘Higher for longer’ is absurd baloney,” the market vet Larry McDonald said in a post on X Sunday, referring to the Fed signaling it would hold interest rates at about their current level well into 2024 in a bid to kill off inflation. “A 6% + Fed funds and Bank of America is near insolvency.”

    It’s important to remember that BofA’s $130 billion losses are still unrealized. Unlike SVB, it isn’t officially in the red yet because it has not sold its bond holdings.

    The bank’s chief financial officer, Alastair Borthwick, shrugged off the market’s worries on last month’s earnings call, pointing out that most of the bank’s fixed-income portfolio was low-risk government bonds it planned to hold until the debt expires.

    “All of these are unrealized losses are on government-guaranteed securities,” he told reporters. “Because we’re holding them to maturity, we will anticipate that we’ll have zero losses over time.”

    There’s still a possibility that spooked BofA customers will pull their money en masse, as they did with SVB — but that hasn’t happened. In fact, deposits are up after registering about 200,000 new accounts in the third quarter.

    Some analysts also believe the worst of the Treasury-market rout is now over, with the Federal Reserve starting to signal that its tightening campaign is nearly done. Ten-year yields have softened in recent weeks, falling from 5% to 4.6% as of Tuesday.

    Banks under pressure

    That doesn’t mean the Big Four banks can afford to just dismiss the bond rout.

    In a paper published earlier this year, researchers for the Kansas City Fed concluded that paper losses could still drag down a bank’s share price: “Unrealized losses can increase equity costs as investors’ perceptions of financial health deteriorate.”

    That’s been happening this year, with three of the big four banks’ stocks sliding. Predictably, Bank of America has been worst affected, with its stock down 24% over the past year and 14% year-to-date.

     

    “Worries over unrealized losses on sovereign bond holdings are also weighing on the US lenders, to again reflect concerns over rising interest rates and whether the US Federal Reserve will ultimately tighten policy by too much for too long,” AJ Bell’s Russ Mould said in a note last week.

    Unrealized losses may not be about to trigger another financial crisis — but as long as bank stocks are down, they’ll remain a concern for Wall Street’s biggest names.

    Read the original article on Business Insider

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  • ‘The Big Short’ investor Steve Eisman says he’s buying stocks rooted in the ‘old economy,’ and that there’s no new housing crisis in sight

    ‘The Big Short’ investor Steve Eisman says he’s buying stocks rooted in the ‘old economy,’ and that there’s no new housing crisis in sight

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    Paramount Pictures

    • Steve Eisman of “The Big Short” fame told the Wall Street Journal his current investing outlook.

    • He calls his thesis “revenge of the old school,” noting he likes “old economy” stocks.

    • Eisman, who was played by Steve Carell in the movie, also said there is no new housing crisis.

    Bond yields are hovering near 5%, stocks are under pressure, and the housing market has frozen over.

    Amid the tumult, investor Steve Eisman, known for his bet against collateralized debt obligations backed by soured mortgages ahead of the 2008 crisis, shared his market outlook with the The Wall Street Journal.

    Eisman, who was depicted by Steve Carell in “The Big Short,” is now a managing director at Neuberger Berman. He was one of a handful of investors who famously profited via prescient bets that the housing market was in a bubble that was about to burst.

    But now, with low home inventory, mortgage rates at 8%, and borrowing costs climbing, he said there is no housing crisis looming on the horizon.

    He’s instead turned his focus to the debt market, the Journal reported, and he’s buying bonds for the first time in his career. To play the government’s big spending spree, he’s leaning into an investment thesis he calls “revenge of the old school.”

    “This is the first industrial policy in the U.S. we’ve seen in several decades,” Eisman told the Journal. “The money isn’t spent yet — it’s the government, it doesn’t take a week. There has been no revenue impact at this point and I don’t think most of the spending has been embedded in any stocks.”

    So-called “old economy” stocks, in his view, include names in construction, utilities, and materials.

    Meanwhile, he’s not looking to buy bank stocks or hypergrowth stocks. He thinks that era of investing is over.

    “What does Vulcan Materials do?” Eisman said. “It makes rocks. This isn’t the nitty-gritty technical aspects of AI. The fundamentals of these companies are not difficult to understand, and they will tend to have the wind at their backs.”

    Read the original article on Business Insider

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