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Market Dashboard

- September 30, 2022

SUMMARY

GROWTH, INFLATION & POLICY

Stubbornly persistent inflation has eroded recent nominal growth; focus now shifts to when, and by how much, inflation will ease and if stagflation can be avoided

Stubbornly persistent inflation has eroded recent nominal growth; focus now shifts to when, and by how much, inflation will ease and if stagflation can be avoided

Atlanta Fed expectations for 3Q22 GDP rose sharply toward the end of the September, largely driven by improvements in net export and consumer spending estimates

Global manufacturing activity dropped in September as emerging market activity contracted while developed market activity stalled further

Industrial production and leading indicator growth peaked a year ago, have been slowing since; forward-looking indicators continue to trend lower

Stocks sold off sharply in September and are once again down over 20% from all-time highs; unemployment, which is a lagging indicator, remains low

Pre-Russian invasion, global inflation was already at a decade-high due to lack of investment in commodity supply, labor tightness, rising housing prices, supply chain bottlenecks, etc.

Inflation appeared to be peaking on a Y/Y basis, but the August surprise places doubt on the level and speed of moderation towards the end of the year; we are likely not headed back to 2% any time soon

Intermediate-term inflation expectations have eased after breaking out to multi-decade highs; 2-year inflation breakeven is below 2% for the first time since 2020

Real yields have remained deeply negative except for TIPS-implieds; gold declined in September with most of the weakness driven by dollar strength

Relative rate expectation differences of U.S. vs. Europe and Japan are still dramatic, supporting the U.S. dollar; 1H23 U.S. rate cuts no longer priced in

Dramatic U.S. dollar strength has been driven by safe-haven bid, and attractive relative yields

The implied year-end Fed funds rate is back near local highs as the market has repriced the Fed pivot following September FOMC

GROWTH, INFLATION & POLICY

Fed funds rate is currently 0.92% below the 2-year yield, but the 4.5% expected terminal Fed funds rate suggest 2-year yield may continue to move higher

Fed’s planned asset sales ($47.5 bn/month from June-August and $95bn from September) has started to take shape but have come in well below these levels

EQUITY

Despite dropping back into bear market territory, U.S. stocks have outperformed their international peers this year; EMs underperformed over the quarter

GAMMA (formerly FAAMG) underperformed the S&P 500 ex-GAMMA by 5.3% in September, trailing by just under 15% year-to-date

The S&P 500 made new bear market lows and is currently 24% from its all- time high

Current drawdown vs. historic bear markets

Cyclically-adjusted P/E (CAPE) multiples by country; >5% yields in Colombia, Brazil, Chile, Norway, Australia and Italy; Russian markets remain effectively closed for offshore investors

July’s rally took U.S. equity valuations back into overvalued territory, recent decline has eased valuation pressure somewhat but still don’t appear cheap

What if inflation doesn’t roll and stay lower? How low can we go? P/Es to consider are 16x, 14x, and 12x, applied to various levels of earnings decline

The last time inflation was as elevated as it is now, P/E multiples were in the high single digits to low teens

Nominal sales and earnings growth expected to decelerate but remain healthy in 2022; impact of inflation and potential recession remain wild cards

Forward-looking valuations have improved dramatically, but earnings estimates will now come into question given potential margin pressure; value still looks relatively cheaper

EM stocks remain relatively cheap vs. developed markets, but “value trap” risk remains due to geopolitics, global food and energy crisis

Still a long way to go? The weight of technology and consumer discretionary stocks in the S&P 500 has dropped to 34.5% but still near historic highs

Despite being in a bear market, stocks are arguably less attractively priced vis-à-vis bonds than they were coming into the year

A loose correlation exists between the S&P 500 equity risk premium (ERP) and 1-year forward returns; ERP currently at a middling 2.4%

Equity put/call ratio has a strong inverse correlation to equity returns; current showing significant bearish positioning

U.S. stock market valuations have improved, but are still higher than the average valuation reached at the lows of post-war bear markets

Lower equity prices have helped ease valuations; implied volatility was contained for most of the quarter but ended the quarter back above 30

FIXED INCOME & CREDIT

Most U.S. fixed income and credit asset classes were down over the quarter; international developed bonds faired the worst and are now down over the last decade

Parts of the Treasury yield curve have moved into deeply inverted territory as inflation and rate hikes have started to take their toll on growth

Parts of the Treasury yield curve have moved into deeply inverted territory as inflation and rate hikes have started to take their toll on growth

2s10s Treasury spread cratered on rate hike, and subsequent slowdown, expectations and currently sits at -0.45%

Muni-Treasury ratio: muni bonds are looking attractive relative to treasuries on a taxable-equivalent basis at all durations

30-year fixed mortgage rates spiked in September as mortgage rate spreads vs. 10-year Treasury widened; higher rates will have a negative impact on housing and consumers with a lag

Credit spreads at or modestly above average across most sectors; starting to shift up modestly as recession fears start to become more entrenched

Credit spreads widened in September; notably, CCC-rated bonds widened by 106bps and have widened 603bps since the start of the year

High yield-to-investment grade muni spreads have widened from 2022 lows but remain tight relative to history

High yield spreads through the COVID-19 crisis highlight the episodic nature of volatility with an active Fed put, which may not be in place during next crisis

REAL ASSETS & INFRASTRUCTURE

While energy gave back returns in September, it was the only area of the real assets and infrastructure category to be up in Q3; REITs continue to struggle in the rising rate environment

Crude oil and gasoline inventories remain well below long-term averages, despite nearly 180 million barrels being released from U.S. SPRs YTD

U.S. strategic petroleum reserves have been depleted to the lowest level since 1985; 180mn barrels depleted, 417mn remaining = 21 days of avg consumption

Energy production is estimated to have outpaced consumption marginally in Q2 for the first time since 2020; the EIA expects this trend to continue short term

Several commodities hit new all-time highs following Russia’s invasion of Ukraine given their importance to global supply of energy and food; recent correction is modest in context

Real yields popped into positive territory (using TIPS implieds); gold will likely only start to work when the Fed ultimately pivots away from rate hikes

Spec positioning in gold futures suggests markets are nearing capitulation, which has generally resulted in above-average forward returns

Gold miners now look very cheap relative to the physical on the surface, but operating costs are a concern given energy and labor backdrop

House prices continued to make new nominal highs, but are starting to show early signs of cooling on an inflation adjusted basis

U.S. mortgage applications have plummeted, -68% year-over-year, as fixed mortgage rates have spiked from 3% to near 7% in just nine months

OPPORTUNISTIC

Insurance-linked securities was the worst performing opportunistic asset class in Q3 as hurricane Ian threatens heavy losses; global macro is the only positive asset class YTD

CEF discounts have widened significantly from -6.4% in August to -9.6% in September; U.S. taxable bonds are trading at widest discount since 2018

CEF discounts mixed by sector but are broadly widening; U.S. taxable bond CEFs are trading at widest discount since 2018

ASSET ALLOCATION

Dramatic U.S. dollar strength, bringing the greenback to parity with the euro, driven by safe-haven bid, relative yields

U.S. dollar strength driven by safe-haven bid, relative yields; potentially helped by brief respite in deficit situation

Futures spec positioning shows bearish positioning in U.S. intermediate term bonds, gold, crude and several stock indices

Copper/gold ratio rolling over suggests growth slowing and longer-term interest rates may follow suit

INDEX DEFINITIONS

S&P 500 Index: Widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market.

MSCI ACWI: (ACWI: All Country World Index) a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

MSCI EAFE Index:(EAFE: Europe, Australasia, Far East) a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

MSCI EAFE Small Cap Index: (EAFE: Europe, Australasia, Far East) a free float-adjusted market capitalization index that is designed to measure the small cap equity market performance of developed markets, excluding the US & Canada.

MSCI EM Index: A free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

Russell 1000 Index: Measures the performance of the 1,000 largest companies in the Russell 3000.

Russell 2000 Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

Russell 3000 Index: Measures the performance of the 3,000 largest U.S. companies based on total market capitalization.

Cambridge Associates U.S. Global Buyout and Growth Index: Based on data compiled from 1,768 global (U.S. & ex – U.S.) buyout and growth equity funds, including fully liquidated partnerships, formed between 1986 and 2013.

Cambridge Associates Private Equity Index: Based on data compiled from 1,468 U.S. private equity funds (buyout, growth equity, private equity energy and subordinated capital funds), including fully liquidated partnerships, formed between 1986 and 2017.

Cambridge Associates Venture Capital Index: Based on data compiled from 1,807
US venture capital funds (1,161 early stage, 210 late & expansion stage, and 436 multi-stage funds), including fully liquidated partnerships, formed between 1981 and 2018.

Bloomberg Barclays U.S. Aggregate Bond Index: A broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Barclays Global Aggregate Index: A multi-currency measure of global investment grade debt from twenty-four local currency markets. This benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

Bloomberg Barclays Global Aggregate ex-USD Index: A multi-currency measure of investment grade debt from 24 local currency markets. This benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Bonds issued in USD are excluded.

Bloomberg Barclays Municipal Index: Consists of a broad selection of investment- grade general obligation and revenue bonds of maturities ranging from one year to 30 years. It is an unmanaged index representative of the tax-exempt bond market.

Bloomberg Barclays US High Yield Index: Covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.

Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index: Includes all publicly issued zero-coupon US Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.

J.P. Morgan Emerging Market Bond Global Index (EMBI): Includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities.

Alerian MLP Index: A composite of the 50 most prominent energy Master Limited Partnerships (MLPs) that provides investors with an unbiased, comprehensive benchmark for the asset class.

Bloomberg Commodity Index: Composed of futures contracts on physical commodities and represents twenty two separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc.

S&P Global Ex-U.S. Property Index: Measures the investable universe of publicly traded property companies domiciled in developed and emerging markets excluding the U.S. The companies included are engaged in real estate related activities such as property ownership, management, development, rental and investment

MSCI US REIT Index: A free float-adjusted market capitalization weighted index that is comprised of equity Real Estate Investment Trusts (REITs). The index is based on the MSCI USA Investable Market Index (IMI), its parent index, which captures the large, mid and small cap segments of the USA market. With 150 constituents, it represents about 99% of the US REIT universe and securities are classified under the Equity REITs Industry (under the Real Estate Sector) according to the Global Industry Classification Standard (GICS®), have core real estate exposure (i.e., only selected Specialized REITs are eligible) and carry REIT tax status.

Cambridge Associates Private Real Estate Index: Based on data compiled from 1,001 real estate funds (including opportunistic and value-added real estate funds), including fully liquidated partnerships, formed between 1986 and 2017.

S&P Global Infrastructure Index: Designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities.

LBMA Gold Price Index: The global benchmark prices for unallocated gold and silver delivered in London. ICE Benchmark Administration Limited (IBA) operates electronic auctions for spot, unallocated London gold and silver, providing a market-based platform for buyers and sellers to trade. The auctions are run at 10:30am and 3:00pm London time for gold and at 12:00pm London time for silver. The final auction prices are published to the market as the LBMA Gold Price AM, the LBMA Gold Price PM and the LBMA Silver Price benchmarks, respectively. The price formation for each auction is in US Dollars.

HFRI Indices: Equally weighted performance indexes, utilized by numerous hedge fund managers as a benchmark for their own hedge funds. The HFRI are broken down into 4 main strategies, each with multiple sub strategies. All single- manager HFRI Index constituents are included in the HFRI Fund Weighted Composite, which accounts for over 2200 funds listed on the internal HFR Database.

HFRI Equity Hedge Index: Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. EH managers would typically maintain at least 50% exposure to, and may in some cases be entirely invested in, equities, both long and short.

HFRI Event Driven Index: Investment Managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments.

HFRI Relative Value Index: Investment Managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities.

HFRI Credit Index: A composite index of strategies trading primarily in credit markets. It is an aggregation of following 7 HFRI sub-strategy indices. HFRI ED: Credit Arbitrage Index, HFRI ED: Distressed/Restructuring Index, HFRI ED: Multi-Strategy Index, HFRI RV: Fixed Income-Asset Backed Index, HFRI RV: Fixed Income-Convertible Arbitrage Index, HFRI RV: Fixed Income-Corporate Index, and HFRI RV: Multi-Strategy Index.

HFRX Indices: Equally weighted index across all substrategy and regional indices. Hedge Fund Research, Inc. (HFR) utilizes a UCITSIII compliant methodology to construct the HFRX Hedge Fund Indices. The methodology is based on defined and predetermined rules and objective criteria to select and rebalance components to maximize representation of the Hedge Fund Universe.

HFRX Short Bias Index: Short-Biased strategies employ analytical techniques in
which the investment thesis is predicated on assessment of the valuation characteristics on the underlying companies with the goal of identifying over-valued companies. Short Biased strategies may vary the investment level or the level of short exposure over market cycles, but the primary distinguishing characteristic is that the manager maintains consistent short exposure and expects to outperform traditional equity managers in declining equity markets.

HFRX Macro/CTA Index: Macro strategy managers trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top down and bottom up theses, quantitative and fundamental approaches and long and short-term holding periods.

HFRX Equity Hedge Index: Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of strategies can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. Equity Hedge managers would typically maintain at least 50% and may in some cases be substantially entirely invested in equities, both long and short.

ASSET CLASS DEFINITIONS

Asset class performance was measured using the following benchmarks unless stated otherwise:

U.S. Large Cap Stocks: S&P 500 TR Index
U.S. Small & Micro Cap Stocks: Russell 2000 TR Index
Intl Dev Large Cap Stocks: MSCI EAFE GR Index
Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index
U.S. Interm-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index
U.S. Interm-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index
U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index
U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index
Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index
Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index
U.S. REITs: MSCI U.S. REIT GR Index
Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index
Commodity Futures: Bloomberg Commodity TR Index
Midstream Energy: Alerian MLP TR Index
Gold: LBMA Gold Price
U.S. 60/40: 60% S&P 500 TR Index 40% Bloomberg Barclays U.S. Aggregate Bond TR Index
Global 60/40: 60% MSCI ACWI GR Index 40% Bloomberg Barclays Global Aggregate Bond TR Index

DATA DEFINITIONS

Alpha: The excess return generated by an active manager or fund relative to its benchmark.

Bear Market: A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market’s downward spiral to be self-sustaining. Although figures vary, a downturn of 20 percent or more from a peak in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over a two-month period is considered an entry into a bear market.

Bull Market: A bull market is the condition of a financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies and commodities. Because prices of securities rise and fall essentially continuously during trading, the term “bull market” is typically reserved for extended periods in which a large portion of security prices are rising.

Credit Spread: A credit spread is the difference in yield between a US Treasury bond and a debt security with the same maturity but of lesser quality.

Default Rate: The default rate is most commonly referred to as the percentage of loans that have been charged off after a prolonged period of missed payments.

Excess Returns: A security’s return minus the return from another security in the same time period.

Full Employment: The condition in which virtually all who are able and willing to work are employed.

Implied Volatility: The estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish.This is due to the common belief that bearish markets are more risky than bullish markets.

Large Cap: Sometimes “big cap”, refers to a company with a market capitalization value of more than $10 billion. Large cap is a shortened version of the term “large market capitalization.” Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share.

Long/Short Equity: Long-short portfolios hold sizeable stakes in both long and short positions in equities and related derivatives. Some funds that fall into this category will shift their exposure to long and short positions depending on their macro outlook or the opportunities they uncover through bottom-up research. Some funds may simply hedge long stock positions through exchange traded funds or derivatives. At least 75% of the assets are in equity securities or derivatives.

Price-to-Earnings (P/E) Ratio: The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio can be calculated as: Market Value per Share/Earnings per Share.

Price-to-Book (P/B) Ratio: The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share. Also known as the “price-equity ratio.

Sharpe Ratio: The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. It also known as the Reward-to-volatility Ratio.

Shiller P/E: Valuation measure that takes into consideration the price and cyclically-adjusted earnings of a security, adjusted for inflation.

Small Cap: Small cap stocks are generally defined as the stock of publicly traded companies that have a market capitalization ranging from $300 million to about $2 billion. Small cap stock companies often have a high stock price. It’s the number of available shares that make them “small.”

Spread Changes: Changes in the spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.

Standard Deviation: Measures the historical dispersion of a security, fund or index around an average. Investors use standard deviation to measure expected risk or volatility, and a higher standard deviation means the security has tended to show higher volatility or price swings in the past.

Yield: The income produced by an investment, typically calculated as the interest received annually divided by the investment’s price.

Yield-to-Duration: A ratio used in fixed income investing to compare the amount of return (yield to maturity) an investor is receiving per unit of duration or interest rate risk.

Z-score: A Z-score is a numerical measurement of a value’s relationship to the mean in a group of values. A Z-score of 0 represents the score as identical to the mean score. Positive and negative scores reflect the number of standard deviations that the score is either above or below the mean, respectively.

DISCLAIMER

Magnus Financial Group LLC (“Magnus”) did not produce and bears no responsibility for any part of this report whatsoever, including but not limited to any macroeconomic views, inaccuracies or any errors or omissions. Research and data used in the presentation have come from third-party sources that Magnus has not independently verified presentation and the opinions expressed are not by Magnus or its employees and are current only as of the time made and are subject to change without notice.

This report may include estimates, projections or other forward-looking statements, however, due to numerous factors, actual events may differ substantially from those presented. The graphs and tables making up this report have been based on unaudited, third-party data and performance information provided to us by one or more commercial databases. Except for the historical information contained in this report, certain matters are forward looking statements or projections that are dependent upon risks and uncertainties, including but not limited to factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle.

Additionally, please be aware that past performance is not a guide to the future performance of any manager or strategy, and that the performance results and historical information provided displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be inferred that these results are indicative of the future performance of any strategy, index, fund, manager or group of managers. Index benchmarks contained in this report are provided so that performance can be compared with the performance of well-known and widely recognized indices. Index results assume the re-investment of all dividends and interest.

The information provided is not intended to be, and should not be construed as, investment, legal or tax advice nor should such information contained herein be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. An investor should consult with their financial advisor to determine the appropriate investment strategies and investment vehicles. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. This presentation makes no implied or express recommendations concerning the way any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s specific investment objectives.

Investment advisory services offered through Magnus; securities offered through third party custodial relationships. More information about Magnus can be found on its Form ADV at www.adviserinfo.sec.gov.

TERMS OF USE

This report is intended solely for the use of its recipient. There is a fee associated with the access to this report and the information and materials presented herein. Re-distribution or republication of this report and its contents are prohibited. Expert use is implied.

DEFINITIONS

Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.