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Monthly Archives: March 2013

Gubmint Borrowing and its Decoupling From Interest Rates, Will We Suffer Two Decades of Deleveragiing Like Japan?

“There was once a rough and logical correlation between the level of government borrowing, and the rate of interest on government debt. If the government borrowed more money, the cost of borrowing rose and the private market’s appetite for government debt fell. But that correlation totally broke down around the year 2000:

brokencorrelation

During the George W. Bush Presidency we saw interest rates remain low, even while borrowing spiked. And during the post-Bush recession we saw borrowing spike to a 30-year high while interest rates crawled lower. During the Obama Presidency, borrowing has inched downward but only to Bush-era levels, and rates have slunk ever lower.

This is weird, counter-intuitive stuff. My logical intuition is….”

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China Times: China Is “Fully Prepared For Looming Currency War”

“Just in case Lagarde (and everyone else except for the Germans, who have a very unpleasant habit of telling the truth), was lying about that whole “no currency war” thing, China is already one step ahead and is fully prepared to roll out its own FX army. According to China Times, “China is fully prepared for a looming currency war should it, though “avoidable,” really happen, said China’s central bank deputy governor Yi Gang late Friday.” We look forward to the female head of the IMF explaining how China is obviously confused and that it is not currency war when one crushes their currency to promote “economic goals.” Of course, that same organization may want to read “Zero Sum for Absolute Idiots” because in this globalized economy any attempt to promote demand (by an end consumer who has no incremental income and stagnant cash flow) through currency debasement has no impact when everyone does it. But then again, this is the IMF – the same organization that declared Europe fixed in 2009, 2010, 2011, 2012, 2013 and so on….”

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“A Gusher of Oil Income” – $FOR Your Consideration

Forestar Group boasts a rich portfolio of assets and businesses, including 136,000 acres of real estate, mostly in Texas; 752,000 acres of oil and gas properties; 1.5 million acres of water rights; and 275,000 acres of timberland. Yet the company trades for just a fraction of its net asset value, as investors don’t quite know what to make of this diverse mix.

Peter Martin, an analyst at JMP Securities, believes the shares are trading at a 40% discount to net asset value, which he puts at $18 to $43 a share. Forestar’s shares (ticker: FOR) closed on Friday at $17.56, or 1.2 times book value. The midpoint of Martin’s range is $30 a share.

ANdrew Penner/Getty ImagesForestar has been a collector of royalty payments from oil and gas drillers, but now has become a driller itself.

The discount to net asset value isn’t likely to persist. With the housing market improving, Forestar is accelerating its sales of residential lots and investing the proceeds in higher-returning ventures, including its oil and gas business and real-estate development properties.

The strategy calls for tripling sales of residential lots, oil and gas production, and earnings before interest, taxes, depreciation, and amortization. From 2008 to 2011, Forestar generated average Ebitda of $34 million a year. Through 2015, management is targeting average annual Ebitda of $120 million. Last year, Ebitda reached $90 million.

As Forestar’s strategy unfolds, net asset value and book value could rise, driving the stock higher, perhaps by as much as 70%. Martin thinks the shares are worth $29, or 1.6 times his estimated 2013 book value.

Incorporated in 1955 as the Lumberman’s Land Corp., Forestar develops residential and commercial lots and sells them to builders. In addition, it owns interests in a hotel and three residential communities. Seventy percent of the company’s real-estate investment is located in Texas, in attractive markets such as Austin, Dallas, and Houston. A legacy timber business in Georgia produces fiber that Forestar sells primarily to Temple-Inland, its previous owner. Forestar was spun off from Temple Inland, now part ofInternational Paper (IP), in 2007….”

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Asian Markets Blast Into Bull Mode Dishing up 22% in 2013, Can They Keep the Run Going?

“Asian markets look poised for further gains — with China, Japan, and Korea expected to lead the group — after lagging behind the U.S. since the markets hit bottom in 2009.

The MSCI AC Asia Index is up 81% from the March 9, 2009, trough, powered by 200%-plus gains from the region’s smaller markets, including Indonesia, the Philippines, and Thailand, which delivered strong domestic growth in spite of the global malaise. Recent political stability and stronger financial health set the stage for much of that growth, but with valuations climbing to as high as 19 times 2013 profit estimates for the Philippines, some investors are taking a pass — even though the longer-term prospects are promising.

Instead, strategists are looking to the region’s biggest markets to regain their leadership. Fears of a hard landing in China are easing. A steadier global economy offers upside for Korea’s exporters, and new Japanese Prime Minister Shinzo Abe has introduced stimulus measures and a new inflation target — known as Abenomics. All could rejuvenate the market.

The MSCI AC Asia Index’s gains from the March 2009 trail the 115% rebound in the Dow Jones Industrial Average, but since June, Asia’s 22% rise has outpaced the 16% gain in the Dow. Even so, at 10.8 times 2014 earnings, the MSCI AC Asia Index is slightly cheaper than the Dow, which trades at 11.6 times 2014 earnings. Strategists say the Asian markets possess more of the factors needed for further gains.

“We often say that the first 20% of a rally is not driven by fundamentals, but the next 20% is where companies and economies need to deliver,” says Hasan Tevfik, a global equity strategist at Citigroup. “On that basis, you can tick more of the conditions off for Asia than in Europe and even the U.S.”

Earnings growth is one such condition, and Asia, excluding Japan, has a better shot at delivering double-digit growth this year than Europe or the U.S., Tevfik says. That’s not to say the region is about to see a raft of earnings upgrades, but less bad news is likely to be a major driver, especially as the pace of earnings downgrades in China and India decelerates….”

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Junk Bonds are Still All the Rage, Do We Have a Bull or Bubble?

“Early last month, Fed Governor Jeremy Stein gave a speech titled Overheating in Credit Markets: Origins, Measurement, and Policy Responses that raised the question of whether or not we might be seeing a bubble, and if so what might be done about it.

You’ve probably heard a lot of talk about the aggressive lengths that money managers are going to to “reach for yield” in the context of this ultra low-rates environment.

Stein didn’t sound too fearful yet, but the overall concern is that we could be setting up another credit bubble, just like before the recent crash.

In the latest version of their US Interest Rates Strategist letter, Morgan Stanley‘s Vincent Reinhart and Matthew Hornbach look at the scene in corporate credit and determine that the market might be “modestly rich” rather than straight-up “overheated.”

Three charts from their work stand out, that nicely call into question the idea of a bubble….”
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A Look at Why $AMZN is a Beast

“Warren Buffett is known as the world’s most famous “value investors”, but that term is not well understood.

In his latest letter to shareholders (.pdf), Buffett includes a great paragraph explaining that value is not synonymous for cheap.

More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes reverted to my old habit of bargain-hunting, with results ranging from tolerable to terrible. Fortunately, my mistakes have usually occurred when I made smaller purchases. Our large acquisitions have generally worked out well and, in a few cases, more than well……

…..Over the past four quarters, for instance, Amazon.com AMZN generated $61.1 billion in revenues. Its cost of goods sold, or basic expenses, amounted to $44.3 billion, leaving gross profits of $16.8 billion on total assets of $32.6 billion. But, largely because the company spent nearly $14 billion on R&D and marketing, its reported net income was negative $39 million.

Amazon is one of the most controversial stocks in the world, because it’s price-to-earnings ratio has always been sky high. It’s currently trading at a nosebleed 180x forward earnings.

But it’s one of the highest quality companies in the world, generating incredible gross profits relative to its assets, and the stock has had an amazing run because of it.”
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Read more: http://www.businessinsider.com/warren-buffett-on-high-quality-stocks-2013-3#ixzz2MOUz0ooO

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February Sees a Slowing of Mutual Fund Flows, January Shows a Record $81b Invested

“After taking money off the table toward the end of 2012, individual investors came back with a vengeance in January, adding a record $80.6 billion to their mutual fund holdings, according to the Investment Company Institute.

Investors added nearly $38 billion to stock funds during the month, with a little more than half of that flowing into international stocks.

Nearly $33 billion, or 41% of the total monthly inflow, went into bond funds.

That doesn’t come as much of a surprise. Investors have shown a strong attraction for bond funds since the financial crisis. While the bet has paid off so far, experts are warning that ongoing investment in bond funds could leave investors with heavy losses when interest rates begin to rise….”

130227154347-chart-fund-inflows-620xa

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The Fed Wants Your Retirement Account

“Quietly, behind the scenes, the groundwork is being laid for federal government confiscation of tax-deferred retirement accounts such as IRAs. Slowly, the cat is being let out of the bag.

Last January 18th, in a little noticed interview of Richard Cordray, acting head of the Consumer Financial Protection Bureau, Bloomberg reported “[t]he U.S. Consumer Financial Protection Bureau [CFPB] is weighing whether it should take on a role in helping Americans manage the $19.4 trillion they have put into retirement savings, a move that would be the agency’s first foray into consumer investments.”  That thought generates some skepticism, as aptly expressed by the Richard Terrell cartoon  published by American Thinker.

Days later On January 24th President Obama renominated Cordray as CFPB director even though his recess appointment was not due to expire until the end of 2013.

One day later, in the first significant resistance to President Obama’s concentration of presidential power, a three judge panel of the U.S. Court of Appeals in Washington DC unanimously said that Obama’s Recess Appointments to the National Labor Relations Board are unconstitutional.  Similar litigation testing the Cordray appointment to the CFPB is in the pipeline.

The Consumer Financial Protection Bureau (CFPB) created by the 2,319 page Dodd-Frank legislation is a new and little known bureau with wide-ranging powers.  Placed within the Federal Reserve, a corporation privately owned by member banks, the CFPB is insulated from oversight by either the President or Congress, its budget not subject to legislative control.  It is not even clear that a new President can replace the CFPB director on taking office.

Unusual legal and political environments have a significant impact on the CFPB. With Cordray’s recess appointment in doubt several questions remain unanswered.

1) What will become of the CFPB when Cordray’s appointment is found invalid?  An indicator comes from the NRLB, which operated unconstitutionally for years without a quorum.  In 2007 the Senate threatened no NLRB nominations reported out of committee.

The NLRB continued operating with two members.  Then a Supreme Court ruling in June of 2010 invalidated the NLRB decisions for lack of a quorum.  Fisher & Phillips give the details about what was done next.

But recovery from the Supreme Court’s sting was quick, with Liebman and Schaumber still on the Board and with two new Members confirmed, … the suddenly full-strength Board simply added a new Member to the “rump panel” of the original decisions and managed to rubber-stamp many of the disputed Orders – at a record-setting pace – with the same result…

This may explain why President Obama renominated Cordray a year early.  Once confirmed Cordray can rubber-stamp decisions made while he was unconstitutionally appointed.  Otherwise those decisions will be invalidated.

2) What will the CFPB do with your money?  The CFPB incursion into individual personal savings, in order to control how you invest your money, isn’t a new idea. Current proposals grew from a policy analysis as disclosed by Roger Hedgecock.

On Nov. 20, 2007, Theresa Ghilarducci, professor of economic policy analysis at the New School for Social Research in New York, presented a paper proposing that the feds eliminate the tax deferral for private retirement accounts, confiscate the balance of those accounts, give each worker a $600 annual “contribution,” assess a mandatory savings tax on every worker and guarantee a 3 percent rate of return on the newly titled “Guaranteed Retirement Accounts,” or GRAs.

How would that be accomplished?  The Carolina Journal reported Ghilarducci’s 2008 testimony to Nancy Pelosi’s House.

Democrats in the U.S. House have been conducting hearings on proposals to confiscate workers’ personal retirement accounts “including 401(k)s and IRAs” and convert them to accounts managed by the Social Security Administration.

Your Government universal GRA investment savings account is an annuity managed by Social Security….”
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Check Out How Sequestration Hurt Japan

“The introduction of the sequester — the automatic across the board spending cuts that will kick in starting today —  is the first real fiscal tightening that the US has engaged in since the crisis ended.

There’s a widespread feeling that it’s premature and going to be harmful to the economy, which remains mired in weak growth and unemployment that’s too thigh.

This has ominous parallels to Japan, which also saw several bouts of premature tightening (fiscal and monetary) during its long slump.

And not only that, the tightening (and then subsequent loosening) frequently coincided with downturns in the market….”

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The Official Recession Indicators Are Now Showing Contraction

“Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.

There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:

  • Industrial Production
  • Real Personal Income (excluding transfer payments)
  • Employment
  • Real Retail Sales (a more timely substitute for Real Manufacturing and Trade Sales)

The Latest Indicator Data: Real Personal Income Less Transfer Payments

I’ve now updated this commentary to include the January Personal Income data, the red line in the chart below. As expected, the January brought the inevitable reversal of the dramatic advance in the November and December data, which was a result of moving income forward to manage the tax risk in anticipation of the Fiscal Cliff. The -4.7% decline in January essentially cancels the 1.4% rise in November and 3% rise in December. The January year-over-year number probably gives us a better sense of the economic reality: Personal Incomes Less Transfer Payments are essentially flat — up a tiny 0.7%.

The chart and table below….”

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Warning: Stock Market Likely to Crash From Here, 50% Drop!

 

“I don’t relish the job of constantly pointing out the risks to the equity markets. But since few on Wall Street seem willing (or able) to do this, I’m “making the call” for a market correction, as enough variables have aligned to indicate a high likelihood of stocks heading downwards from here.

 

I’ve only given one other such warning about equities before, and that was in March of 2008, when I warned of the possibility of a 40% to 60% decline in stock prices by Fall. I am making a similar call today, with the understanding that I am usually a bit early to the game with my views.

Before I get into the details, the broad outline is that I see a case where speculative fevers, propelled by the Fed’s $85 billion thin-air money printing program, have more or less run their course, with the Dow and S&P indexes stalled near their all-time highs. That is, $85 billion a month is what it takes to merely keep the Dow near 14,000 and the S&P 500 near 1,500.

On a fundamental basis, I see numerous signs of consumer weakness, political in-fighting and paralysis in DC, high insider selling, and the return of the retail investor (a.k.a. “greater fool”) to the stock market.

On a technical basis, there are numerous tell-tale signs of a market top, including too much bullish sentiment, waning momentum on multiple timeframes, and too many NYSE stocks being above their 200-day moving average (at least until recently; that’s begun to correct).

(Source)

Triple Top?

The S&P 500 and Dow Jones are both once again near all-time highs…for the third time.  The old saying third time’s a charm can work both ways when it comes to the stock market.  Sometimes an index will bust through to new highs, and other times it will fail spectacularly crashing to new lows.

We should all be watching the behavior of the major indexes here, because the possibility of a major triple-top failure is quite high, for reasons outlined below.

If the S&P 500 fails at the triple top and breaks down, from a charting perspective the next thing for it to do is revisit the bottom and then make up its mind as to what it wants to do next.  The implication here is that a major failure of the S&P 500 will open the possibility of it revisiting the 600-800 level, or some 45% to 60% lower from the 1,500 level where it currently churns.

It will take some time to get to that level, typically 3-6 months, unless there’s some sort of financial accident to hasten things along, in which case it could all be over in a month or two….”

Full article and charts 

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Ten Unusual Volume Spikes

“24/7 Wall St. often looks for crazy volume moves and there are more than just a handful today.

AFC Enterprises, Inc. (NASDAQ: AFCE) is up 8% at $32.41 after being called a Buy by Jim Cramer last night. Interestingly enough, this is a 52-week high as the prior 52-week range was $15.33 to $32.26. We have seen 390,000 shares trade hands versus a usual volume of about 150,000.

American Public Education, Inc. (NASDAQ: APEI) is down 7% at $36.20 after yesterday’s earnings against a 52-week range of $24.88 to $42.17 and the 403,000 shares so far compares to a mere average daily volume of only 93,000 shares.

Atlantic Power Corporation (NYSE: AT) is down 29% at $7.06 at a new 52-week low under the prior range of $9.90 to $15.18 after earnings and cutting its dividend. The 7.2 million shares so far is closing in on a 10X volume spike versus the average volume of 828,000 shares.

EV Energy Partners LP (NASDAQ: EVEP) is down 7% at $52.07 against a 52-week range of $43.56 to $73.75. We have seen volume of 1.04 million shares (or units) versus average daily volume of only 278,000.

Foster Wheeler AG (NASDAQ: FWLT) is down almost 17% at $19.98 against a 52-week range of $15.26 to $27.13 after earnings were light this morning. What really stands out is the 7.45 million shares versus an average daily volume of 873,000 shares. That will be a 10X volume spike by the end of the day. This is the highest volume going back to 10.3 million shares one day all the back on November 30, 2011.

GMX Resources Inc. (NYSE: GMXR) is one hardly ever mentioned or noticed, but not this Friday. At $3.58, the 48% gain is on volume of over 4 million shares. That is a 30X volume spike against an average volume of about 134,000 shares. We went back over three years ago and could not find a day with this much trading volume….”
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Take Notice of the Disconnect Between Durable Goods & the S&P

“Durable goods orders were mixed this morning, but have generally been stagnant for the last 6 months or so.  It’s more consistent with a slowly expanding economy as opposed to the one you might expect we have based on the S&P 500′s unstoppable rise in recent months.

I bring the S&P 500 up because durable goods tend to track the market very closely (see figure 1 below).  As you can see in the following chart, the 30 year history of durable goods and the S&P 500 is very highly correlated.  So, when you begin to see one diverge from the other you have to start asking yourself whether the market is pricing in an overly optimistic outcome or if the economy has yet to catch up with what the market is seeing.  Of course, in a market that is highly sensitive to the jabbering of central bankers, the conclusion might be more obvious than it appears.

Econoday has more on today’s DG release:

“Durables orders are living up to their reputation as one of the U.S.’s most volatile monthly indicators. But there still were positives. New factory orders for durables in January reversed back down 5.2 percent, following a spike of 3.7 percent in December. Analysts expected a 4.0 percent monthly decline. The transportation component was the key culprit behind the drop, which plunged 19.8 percent after a 9.9 percent gain in December. Excluding transportation, durables orders increased a healthy 1.9 percent in January after a 1.0 percent rise the month before. Market expectations were for a 0.2 percent rise in orders excluding transportation…..”

 

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NASDAQ Sentiment Reaches The Highest Levels Since 2000

“You might have thought that Monday’s slide in the equity market wiped out quite a bit of the euphoria in the markets.  If so, you’d be wrong based on the Hulbert Nasdaq Sentiment Index which is still at its highest level since March 2000:

What I find even more intriguing than all the technical mumbo jumbo I just wrote about, is that just about everyone is not expecting the outcome laid out in this post. Mark Hulbert runs a great service called Financial Digest, which tracks the opinions and recommendations of various newsletter advisors for the Nasdaq. Just like any other contrarian indicator, when the Hulbert Nasdaq Sentiment shows the majority of “gurus” holding net short exposure it usually means its the time to buy and visa versa. Chart 3 shows that the current readings were above 90% net long exposure, which is one of the most bullish readings since March 2000 (the month the Tech Stock bubble burst). With just about everyone positioning themselves for higher prices, what could possibly go wrong? It is truly rare to find anyone out there expecting a bear market, that is for sure….”

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Some Apps to Help You Defeat Hackers

“(MoneyWatch) It’s a dangerous world out there for computer users, with hackers constantly on the prowl for ways to steal passwords, penetrate networks or read people’s emails. Even your private voice communications may not be secure since cell phone service and Skype use only relatively lightweight encryption to keep away prying ears.

There are highly secure solutions available, of course. CellCrypt, for example, is a commercially available, military-grade encryption system that runs on smartphones like iPhone and Android. But not just anyone can take advantage of it — there’s no consumer licensing available, for example.

Still, there are many other tools you can use instead. Here is a roundup of the most intriguing security solutions available to consumers and small business today. Use each of these tools, and you will have a highly secure shield around all of your communication and data…..”

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Fitch Threatens U.S. Downgrade Again Over Debt Ceiling

“Fitch Ratings reiterated that another so-called debt ceiling crisis would probably lead to a reduction in the U.S. credit rating.

“The debt ceiling limit which comes back into force on May 19, certainly if that wasn’t addressed in a timely fashion, we don’t think another debt ceiling crisis like we had in August 2011 would be consistent with the U.S. retaining its AAA rating,” David Riley, managing director of sovereign ratings, said on Bloomberg Surveillance in an interview with Sara Eisen.

Congress suspended the U.S. debt ceiling until May 18. Failure to increase the limit “in a timely manner,” which Fitch said it doesn’t expect to happen, “would prompt a review and likely downgrade of the U.S. sovereign rating,” the company said in a statement Feb. 27.

Federal spending will be reduced by $85 billion in the final seven months of the fiscal year ending Sept. 30 and by $1.2 trillion over the next nine years in automatic cuts set to start before midnight…”

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Rumors Rally U.S. Equities

“We saw what happened yesterday when the unknowable vote went exactly as everyone expected – the supposedly totally-priced-in equity market dumped. Today, the rumor is that a deal is on the cards and sure enough S&P 500 futures ramp almost 20 points. Interestingly, this ramp has stopped just as Gold and stocks have recoupled relative to each other on the week….”

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Hedge Fund Manager Druckenmiller “Sees a Storm Coming”

“Hedge fund icon Stanley Druckenmiller sat down with Bloomberg TV’s Stephanie Ruhle, saying that he’s decided to speak out now because he sees “a storm coming, maybe bigger than the storm we had in 2008, 2010.” His fear is that the ballooning costs of Social Security, Medicare and Medicaid (which with unfunded liabilities are as high as $211 trillion) will bankrupt the nation’s youth an pose a much greater danger than the debt currently being debated in Congress.  He said, “While everybody is focusing on the here and now, there’s a much, much bigger storm that’s about to hit… I am not against seniors. What I am against is current seniors stealing from future seniors.” While not exactly Maxine Waters’ sequestration-based 170 million job loss, this concerning interview is must-see for his clarity and forthrightness from who is to blame, to the consequences of gridlock, our society’s short-term thinking, and the concerning demographics the US faces….”

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Horse Meat! It’s What’s for Dinner, U.S. to Allow Horse Slaughtering Plant Since 2007

“The United States Department of Agriculture is likely to approve a horse slaughtering plant in New Mexico in the next two months, which would allow equine meat suitable for human consumption to be produced in the United States for the first time since 2007.

The plant, in Roswell, N.M., is owned by Valley Meat Company, which sued the U.S.D.A. and its Food Safety and Inspection Service last fall over the lack of inspection services for horses going to slaughter. Horse meat cannot be processed for human consumption in the United States without inspection by the U.S.D.A., so horses destined for that purpose have been shipped to places like Mexico and Canada for slaughter.

Justin DeJong, a spokesman for the agriculture department, said that “several” companies had asked the agency to re-establish inspection of horses for slaughter. “These companies must still complete necessary technical requirements and the F.S.I.S. must complete its inspector training,” he wrote in an e-mail referring to the food inspection service….”

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