Archive for May, 2012

Is Buffett Way Off Base On This One?

By: ispeculatornew | Date posted: 05.31.2012 (5:00 am)

I’m a big believer in Berkshire Hathaway and in Mr Buffett as I have written many times in the past months on this blog. I like the way he manages his fund, his long term, fundamental based investment method and I admire how patient he has been in holding on to cash when no great investing opportunities were available. Those and many other things are what I’m trying to learn from Buffett.

Clearly, he is not a technology geared person or investor. He has said himself that he spends most of his time looking into piles of papers, financial statements and other documents. You could certainly argue that is is much easier to access this information online but I guess it’s the same info so it doesn’t quite matter. Anyway, it’s not like Mr Buffett is going to be buying shares of Google ($GOOG), Facebook ($FB) or other tech stocks. He likes to buy businesses that are simple and that he can easily understand which has worked incredibly well over the decades. Who could blame him?

Newspapers = Dead?

In recent months, Buffett has agreed to buy many different publications including Virginia’s Richmond Times and almost 100 other newspapers. He said that he saw tremendous value in these stocks. That is certainly a contrarian view in this era where the New York Times (NYT), clearly the gem of the newspaper industry, is worth fractions of what it once was despite a solid publication and brand. Why? Newspapers are going through difficult times as they try to adapt to this new digital era. These times where classified ads and many other types of advertising are moving online where they can be done more efficiently and at a lesser price (often free in fact).In short, they compete with free online publications.

“This is an unsustainable model and certain of our papers are already making progress in moving to something that makes more sense” – Warren Buffett

Who am I to argue with Mr. Buffett? But to me, that seems very difficult to determine frm the perspective of someone who uses the internet and new technology so little. Publications such as the Huffington Post and others are clearly able to compete to some extent. The industry will change in the next few years but I’m not quite ready to say that it is unsustainable. Other publications such as Clusterstock have also been operating under a free model making profits. I’m not saying that newspapers will die, I don’t believe so. Clearly they add some value. But I’m not sure that Mr. Buffett knows exactly what he is getting himself into. It’s true that he paid very little and in that sense has little to lose.

What about you? Do you agree with Buffett’s view?

Teaching Your Kids To Become Great Investors

By: ispeculatornew | Date posted: 05.30.2012 (5:00 am)

As a soon-to-be dad for the first time, I have a lot of questions regarding how things will go, what I should expect, etc. While my first few months will probably be spent about much more basic things, I do expect and hope to reach the point where I start trying to get my kids as educated as possible about money.

One Of My Most Important Teachings?

You could certainly argue that there are many many more important things to teach about than money and clearly, I would agree. I do however think that our society has grossly underestimated the importance of learning about money. About making, spending, saving, planning and investing it. It can make a world of difference yet most of us spend little to no time in school learning the most basic notions. I could probably write a full book about this, I’m sure many have already done so, and if you have any books to recommend, I’d love to hear about them. Personally, I would split lessons into the following:

-Make Money

Understanding the value of money comes in different ways. I think that getting a weekly allowance is good but so is doing extra work (not the normal chores that you should ready be doing) and making money for it.

Even better of course is teaching the basics of building a business, no matter how small (lemonade stand?) or how big.

-Spending

In my opinion, spending is as important as everything else. Being a smart shopper can make an incredible difference. Part of it is planning bigger expenses and saving for them. Taking notes to know where my kid has spent his money and looking back at those a few months later can also send a clear message. Sometimes, it comes as no surprise but in other cases the result can be rather shocking.

-Saving

I am a very strong believer in setting up an Automatic Savings Plan. Setting money aside as soon as I get it has worked incredibly well for me. It doesn’t have to be that much. I’d rather give my kid a bit more but force him to save part of it every week in a different place or bank account. As years go by and revenues increases, so should the amount that is being automatically saved every week.

-Planning

This lesson might be a bigger challenge because apart from planning bigger and longer term expenses, there is very little that a young kid would need to plan. Maybe buying a small gift for his parents, brother and/or sister, etc. It would be shorter time planning but I guess it gives you an idea.

-Investing

This would clearly be the most interesting lesson for me as a parent. I think the most critical part would be to explain the compounding effect. It is not easy and I guess the best way is to amplify the effect for the first few years. For example if you gave them a very high return on whatever they have saved away, it could certainly help to explain the concept.

Another very interesting lesson would be buying a dividend stock. Why? Because a quality dividend stock will help in understanding investing basics on so many levels. I think that seeing money come in would be of great help.

Do any of you have tips or experience teaching money?

An Industry That I’m Staying Far Away From

By: ispeculatornew | Date posted: 05.29.2012 (5:00 am)

Last week, I did give you an indication of one sector that I’d be unwilling to try investing in these days. Banks in general are difficult to value but especially European banks. They have so many ongoing issues, have some terrible loans on their books, hold bonds that are not marked-to-market, have all kinds of messy relationships with each other (problems of one bank will get the next one in trouble, etc)… It’s a big mess and I’m personally going to stay away for some time.

That Other Sector I Think You Should Avoid

A few months ago, stock exchanges were the next big thing. They were in a race to become global leaders by buying each other with exchanges outbidding themselves to compete with with the global leaders such as the Nyse and the Nasdaq. I would argue that difficult times are ahead for stock exchanges in general.

Difficult Environment

Take as an example the Toronto Stock Exchange which used to control and dominate trading volume in Canada with close to 90% of market share or major exchanges such as the Nyse and Nasdaq. In recent months, they have lost considerable market share to smaller players, dark pools, etc. It just seems like large institutional investors have been able to find better trading venues (especially in terms of price execution and fees).That has ended up meaning very big market share losses, pressure to reduce fees, etc. Take BATS as an example, a US exchange which has been gaining market share in recent months at a very impressive pace.

Huge technology spending is now required because of all of the changes that are occuring with players looking to save pennies here and there.

Regulatory Environment

Because of all of the different issues that have been found in recent years (Madoff, etc), there are increased regulatory issues to deal with from agencies such as the SEC and others. That certainly makes life much more complicated for exchanges such as NYSE that have to hire lawyers, and all kinds of other staff to improve.

Even On The Higher Profit Activities

Traditionally, two alternative ways for exchanges to make profits were to have companies start listing their stocks and selling data. Both sources are under heavy pressure.

IPO’s: If you followed the Facebook IPO at all, you’ll know that both Nasdaq and NYSE were fighting to get it listed. Over the years, more options are being made available both at home and in international markets making it more difficult to charge large amounts for these listings. As it that was not enough, with all of the algo trading, it has become a major challenge to support big IPO’s such as the recent Facebook one which ended up resulting in many different issues for Nasdaq which might end up costing a lot in terms of fees and violations.

Data: There are increasing numbers of firms that have access to data and are able to resell and package them. That has made it much more difficult for exchanges to make huge amounts of money, especially when you compare with a few years ago when live prices are something you couldn’t even find online without paying important sums of money.

For all of those reasons and many others, I’m personally fairly negative about the long term perspectives for big exchanges… yes they are able to sell co-location which has been a tremendous source of revenues but that isn’t enough to overcome everything else…

Taking Profits Too Early?

By: ispeculatornew | Date posted: 05.28.2012 (5:00 am)

Last Monday turned out to be a disappointment for some because I did not have any new trades. I’m sorry to say that I will disappoint again. I do expect to resume making those picks next week though with a fresher mind. I’d love to always be making new picks but when you are on a losing streak, it sometimes makes sense to take some time to reflect on what has gone wrong to see if any adjustment is required. I would rarely make such a change in the middle of the year because I like to think those through but it’s always possible. In that sense, the reader’s email that I discussed last week was very helpful. It’s always good to get secondary opinions. Today, I wanted to discuss two last points regarding that email. Here is one more quote from that email:

Alternative Shorts

I understand that the alternatives for trading pairs are not easy. Perhaps you could have “alternate shorts,” to you main short pick, in case the main pick is not available to short, or has too high an annual interest.

I very much see how this could be useful in cases where going short the stock does not work. This reader has taken short positions with options in a few cases to get around this problem which would work well in general but adds a level of complexity that many of you prefer to stay away from. Alternate shorts are difficult to do because it’s already difficult to find great stock ideas sometimes, finding others could prove to be a big challenge. I will try to provide more information about my thoughts both here and in the free tech stock newsletter so hopefully that will end up working well.

Taking Profits Too Early?

if you eliminated profit taking altogether, and just held winning positions to year end, you would greatly decrease slippage losses from frequent trading, and my guess is, probably increase your profits, too. I don’t know if you can run that data analysis on the your past years of trading. If you could, the results might be interesting.

Talk about hitting a nail on the head. Many have discussed my entry/exit points but I think this is something I truly need to look into. Clearly, there is something to using stop losses to avoid losing too much on a trade but most good traders also know how to ride on their winners. That is NOT something that I currently do and it’s something that I’d like to do more in the future.

One big reason is that when I look for stock pairs to trade, I usually look for stocks that are very wrongly (in my opinion obviously) priced. This would imply potential/expected profits of 30-40% or more in some cases. Closing them as soon as they reach 20% does seem early on several occasions. What I do not like though is simply letting them open no matter what where I could end up giving back my gains. There are some alternatives, where I could close trades once they have fallen back to flat, etc. It’s not an easy problem but it’s something I’m seriously considering changing for next year and I’d love to get your thoughts on this.

I will certainly keep you posted on how my thoughts evolve on this subject as it could end up making big differences in my trading.

How do you manage your portfolio? Do you use stop losses? stop gains? How do you determine the right moment to close out your trades?

Weekend Readings

By: ispeculatornew | Date posted: 05.26.2012 (5:00 am)

A dear friend of ours has been working on a big project that we think will be an extremely solid project. It is a documentary: “I’m fine, thanks!”. I highly recommend that you go see the latest post about it as well as the trailer, it is on ManvsDebt! Here are some other readings that I recommend for the weekend:)

General Readings

Please, DON’T Buy Company Stock in Your 401(k) @ DarwinsMoney
Figuring out the real price of college @ NPR
What is the New Floor for Oil Prices? @ BeatingTheIndex
Market cap as a % of GDP @ The Big Picture

Dividend Readings

How dividend aristocrats have done over the past 5 years @ TheDividendGuyBlog
5 Reliable Dividend Payers Boosting Payouts @ Dividend Monk
Dividend Achievers List @ WhatIsDividend

Technology Readings

Pandora’s results, bigger revenues and losses @ TechCrunch
CEO Of Knight Securities Blowtorches The NASDAQ For Bungling The Facebook IPO @ Clusterstock

 

The Facebook $FB “Fiasco” – Am I Crazy?

By: ispeculatornew | Date posted: 05.25.2012 (5:00 am)

Wow, I have to admit that I did not expect the Facebook IPO to go anything like it has gone so far. The initial valuation of $104B was close enough to what I expected but I certainly did expect some kind of pop. Then, last Friday afternoon, when Morgan Stanley seemed to be using billions of dollars to defend $FB from going under the $38 IPO price, it looked all but certain that the stock would fall. Which it did on Monday. Not a big surprise, Morgan Stanley wasn’t going to keep buying stock for much longer.

How Did We Get Here?

The big question though for me is how we got to the point where buying Facebook was seen as “stupid”, as the new “Pets.com” purchase, the clear sign of a bubble. I have been looking at the media and it becomes a bit more clear when you look at the headlines.  Just look at all of these numbers from ZeroHedge:

There are tons of others that discuss how Facebook’s growth is slowing down because it is being increasingly seen on mobile devices where less ads are currently being displayed. the underlying arguments are always the same. There is little to no growth left for Facebook both in terms of users and advertising dollars.

Am I Insane?

Sometimes I’m sure you feel like you believe something so strongly that everyone else seems to be missing the big picture. I feel that way. Like all of those who are criticizing Facebook are just not getting it. Not that they’re not smart but they just don’t see the whole picture. One has to ask himself.. what is more likely: that I am right or everyone else is? I’m not Warren Buffett by any means but I still feel like I’m decent at this stuff? So what am I missing?

I mean come on, how in the world does GM stopping its $10 million annual advertising campaign mean that Facebook advertising does not work? It also will be making huge cuts in its Super Bowl advertising, is that dead too?

Facebook’s Future Growth Will NOT Come From

-hundreds of millions of users signing up
-Facebook suddenly adding big flashy logos on its website to gain more ad dollars
-Converting mobile users to become desktop ones
-etc

Facebook’s Growth WILL Come From

-Its unique gateway to connect brands with users
-Its unique relationship with millions of companies that advertise their Facebook page instead of their own website, believing that is where their best opportunity resides
-Its power in knowing users better than anyone else (even Google) and placing the most customized ads
-Its  upcoming services such as ad services, its virtual currency, etc. Many others can launch such products but no one is better placed to get it done or partner with those who do

Give Me A Break

So everyone in the world loves Facebook that they connect to it from all of their devices including their mobile phone. How in the world is that BAD news? It’s not. Facebook is simply focused on growth (as it should) so putting a whole team on monetizing mobile makes no sense. Keep the experience unique, get more users involved and in the end, it will pay off.

The One Thing That Has Made Me Pause

The only valid criticism I have seen is that Facebook has apparently warned that growth guidance had been overestimating what is currently happening which could mean slower growth in the next few quarters. There is a lot of speculation about this because Morgan might be in trouble after warning some big clients without telling their other smaller ones…

Sorry For The Rant

I know I might sound a bit upset here but I’m not, I’m really not. This will actually make it cheaper for me to buy Facebook $FB which i had fears would not be possible.  So please tell me, do you think I’m crazy? It’s not like Facebook  is this company with no revenues or profits, with no plan, etc? And by the way, this is also exactly why I try to wait before buying a recently turned public stock. Things can turn out so different from what we initially expected.

How To Double Your Dividend Yield By Selling Covered Calls On A Dividend Portfolio! Why? Pros And Cons

By: ispeculatornew | Date posted: 05.24.2012 (5:00 am)

After posting the most recent update of the Ultimate Sustainable Dividend Portfolio last week, I got an interesting question in the comments:

“What do you think about selling covered calls on a dividend portfolio?” – awake

It is a very interesting question, one that I could debate for a very long time. Before getting started, let me just go back to the basics for a minute.

What Is A Covered Call Option?

Let’s start off with a call option. It gives the buyer the right to buy a stock at a given time for a given price. For example, a:

Call AAPL June 600

Would give the buyer the right to buy 100 shares of Apple per option contract at a price of $600. This could be done at any point between now and the 3rd weekend of June. In order to get that possibility, the buyer would pay a price for that option. The seller of such an option would have to sell the shares at that same price but would receive the option proceeds in return.

A Covered Call Option

The only difference between selling a call option and a covered call option is that the seller of a covered call option would actually hold the stock.

How Would A Dividend Investor Sell Covered Calls?

For example, one of the stocks that I own in the USDP is Exxon (XOM), which I’ll use as an example. Currently, XOM pays a quarterly dividend of $0.57. Suppose that I own 1000 shares of XOM, which pay me $5.70 every quarter, how could that be increased? Here are options that are being traded on XOM.

So I could sell 10 options at $0.55 each of the XOM July C 87.50.

If I did this every quarter, I would double the dividend yield. What is the downside to this extra income? The fact that between now and July, if XOM increases quite a bit, I might have to sell it for $87.50. That doesn’t seem too bad does it? Sure, if XOM rises to $95, I’ll be disappointed to sell it for less, but the odds are rather small and even selling it for $87.50 would mean having made a decent profit on the stock right?

Even better, I could do this on all of my stocks, nearly doubling my monthly income and being able to retire even earlier…

Is There A Catch?

Of course there is!! In financial products, nothing comes free. If you get additional income, there is some downside that is associated or something you are giving up. That does NOT mean it is a bad product though. Covered Call ETF’s for example are becoming very popular and they are not necessarily bad products but they do fit a specific type of market and certainly are more tricky to manage.

In the case of selling covered call options in a dividend portfolio, here are the main benefits and downsides in my opinion:

Benefits:

More Income: Being able to double the monthly income is a huge deal, especially when you are going for a more aggressive dividend portfolio

Downsides:

Limited upside: The market does usually increase over time and usually not in a straight line. Selling options/upside means that you might have to forefeit big gains in bull markets.

Transaction & Liquidity Costs: Buying and selling options can end up meaning significant costs both in terms of commissions paid but also the bid-ask spread tends to be higher.

More Complex: Buying and selling option might seem simple but there are many more variables involved and it becomes a clearly different game. Option pricing requires estimates of volatility, time to expiry, interest rates, etc. If you do not consider those, chances are that you will trade at unfavorable prices. Doing so a few times isn’t an issue but over years it can make a big dfference,

Time Consuming: Part of the benefit of managing a long term sustainable dividend portfolio is the fact that it requires very little time on a monthly basis. That can change quite a bit if you are selling options, which are assigned on occasion or bought back, etc.

In The End

While covered call strategies do have some appeal, I think that the downside is bigger in my opinion. Of course that depends on each person’s situation. An investor could easily sell longer term options, at higher strikes and reduce the work involved.

What about you? Would you consider selling covered calls on your dividend holdings?

You can find out more covered call strategies and about covered call etf’s here

Top International Dividend Stocks – May 2012 – Danger Ahead!

By: ispeculatornew | Date posted: 05.23.2012 (5:00 am)

For several months now, I have been able to put together lists of top international stocks mostly sorting them in terms of dividend yields. We did take a deeper look at some of those names in greater detail such as Vodafone (VOD) while also adding a stock with great international exposure in Aflac (AFL) to both the Ultimate Sustainable Dividend Portfolio and one of the 4 stocks that I picked in this year’s stock stock picking competition.

I’ve written about a critical aspect of dividend investing in the past which are more critical than ever when looking at international dividend stocks:

-looking beyond dividend yield

If you take a deeper look at the top dividend yields for international stocks you will see a very strong trend for European stocks that are coming out near the top of those rankings.  That is a group of stocks that I am personally very prudent before buying. Why? Mainly these reasons:

European Chaos:

-Europe seems to be nearing a cliff in many different ways with Greece and other nations in serious trouble. One of the big results has been a very difficult time for companies operating there, especially banks located in countries such as Greece and Spain. Citizens in those countries have been increasingly worried about what will happen and continued to move their assets to foreign banks, especially in Germany. Thus, I would not be buying dividend stocks of such banks even if they offer great dividend yields.

European Telecoms:

-While there are also many concerns about many of these companies which have been at the top of previous international rankings but also US ones (with FTR at the very top), many of these companies pay high dividends that are unfortunately not sustainable. I think it’s critical to consider the long term perspectives for these companies before starting to buy them, as I had done when looking into Vodafone (VOD).

When It’s Too Good To Be True…

Look at the rankings and you will see the very top dominated by YPF SA, an Argentina-based oil company which is stuck in the middle of huge changes. It remains unclear how the company will be able to keep operating on a private basis and pay reliable, sustainable dividends. Why? The Argentinian government is actually taking over the company. How will it impact shareholders? That remains to be seen. You can see some posts about it on Marketwatch for example. Personally I’m staying away:)

As you can see, there are no miracle, 10% or 15% dividend yield stocks but there are several other high quality candidates, which you can see here:

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Is Taxing The Rich A Lost Cause?

By: ispeculatornew | Date posted: 05.22.2012 (5:00 am)

One point I like to bring up over and over is the fact that while increasing tax rates for the top 1% might seem like a genius plan in theory, it’s a gross oversimplication. There are so many different ways to do so. Recently, I discussed the Megaship that is being built and that will remain near the US coast. It will remain in international seas making it possible to get a very advantageous tax treatment while also being able to hire very solid engineers without going through the whole green card process.

Last week, I read two more examples…

Socialist French Government

You might have heard that the newly elected Socialist party in France has been planning to create a new law that will tax all earnings above $1 million at a 75% tax rate. Imagine all of the savings right? Maybe over 1-2 years that would make sense. But not over the medium term and clearly not over longer periods of time. Why? Everyone will adapt:

Citizens: Many of the top earners in France have already announced they would be moving if this law came into effect. It’s not that difficult. They can move to a nearby country, they can create a corporation based somewhere else that will make most of their earnings, etc. All of these methods become very worthwhile if such a law passes. They are not illegal and will make it possible for such individuals to pay even less taxes than what they are currently paying.

Existing Companies: If you were a multinational company, how likely is it that money you are going to reinvest would be spent in France? Very unlikely in my opinion. Earnings made there will generate so little in the bottom line that it becomes a lot more favorable to slowly move operations abroad.

New Companies: Many in France would like the company to host the next Google, Amazon or the next Facebook. That is simply not going to happen. Bright leaders are very careful about how they setup their projects and it’s not by luck that all of these companies have very efficient tax structures. France would become as bad as it gets if such a law passes so companies or entrepeneurs would simply take their business elsewhere.

Facebook IPO

One policy that the US already has and that is being considered by many others is to tax all expats no matter if they are in the US or not. That certainly complicates life for these individuals and it has limited benefits. Take the case of Eduardo Saverin, the Brazilian born co-founder of Facebook, which you probably remember seeing in the movie “Social Network”. With the IPO only days away, he was set to owe a lot of money, especially since he currently resides in Singapore. Huge capital gains will be applicable as soon as he sells some of his stock.

What Could He Do?

In the end, Eduardo Saverin ended up letting go of his US citizenship in order to avoid the applicable taxes

A Flat World Means Extreme Mobility

In this flat world, as was described by Thomas Friedman, it becomes increasingly easy to move a person, a corporation, an activity or anything else from one country to another. Therefore, raising taxes can work in the short term but it also gives incentives to those that lose in the process to find a more efficient tax structure, which can end up meaning more lost revenues than new taxes for the government…

No New Trades This Week

By: ispeculatornew | Date posted: 05.21.2012 (5:00 am)

After amazing returns last year and a great start to 2012, things have gotten a lot more difficult since. Sure, my stock picking competition picks are doing very well (still in 2nd position) and my tech stock power rankings have been very solid. Add to that a decent performance by the Ultimate Sustainable Dividend Portfolio and you’ll get a thrilled investor/blogger right? Not exactly.

In the past few weeks, I’ve had more trouble finding great trading opportunities for my long & short tech stocks. I’m not sure if the excitement of the Facebook $FB IPO is clouding my judgment but it certainly feels like I’ve been off of my game. Sometimes, you still manage to do well but clearly that has not been the case as I’ve closed several bad trades in the past 2-3 weeks and now stand at an average return of -1% or so. Not terrible but far from great too.

A Break…

Because of that, I’ve decided to take a break from entering new trades in the hopes of gaining a bit more perspective but also hopefully seeing more potential trade opportunities. No, I will not repeat my TripAdvisor mistake by trading Facebook right away although I might get into the action as a longer term, speculative pick.

Questions

Today, I wanted to address some of the questions that I get when I send out my Tech Stock Newsletter. If you have not joined yet, I invite you to do so, to get my thoughts on the stocks that I follow. I often get feedback which I try to answer as much as possible. Today, I thought I’d answer a few concerns or questions:

Slippage: As you might know, I calculate the returns on my trades based off of the opening price. Clearly, that is not ideal. On many instances, the opening price can be a few % off of the price that the stock trades at a few minutes later. It’s perhaps the most volatile time of the day and I’d argue that while not always the case, in general the closing price is much more reliable. A reader had suggested using the VWAP.

My main issue though is to have a point that is easy to compare and verify. A VWAP isn’t and there’s also the fact that as soon as the market opens, news comes out that could have a significant impact and make it much more difficult for me to trade based on the new price.

Another point is that while getting the opening price for the average trader can cause some slippage, many retail investors do not use VWAP strategies and do not have access to them either so this would not make it easier for most investors to enter the trades.

Closing Points: A few readers have expressed their view that I am closing off my positions too quickly. That seems like a fair argument, one that I had been considering last year when making changes to my trading method. I do think this could also make it possible for me to use a VWAP price when entering although since the trades would have more of a long term nature. As time goes by, it is becoming more likely that this will be a change for my 2013 trading.

Am I taking my profits too soon? Very smart readers have told me that I have.. the closing points would probably need to reflect this as well.

Unshortable Stocks: Clearly, some of the stocks that I like to short are difficult and even impossible to short at some brokers because of the high demand. This is something I’ve been discussing quite a bit in the newsletter recently. I will try to pay more attention to this. It’s clearly a challenge because every single broker has different lists of stocks that can be shorted along with fees involved but I would agree that some stocks require paying insane borrow rates which is not something that I (or anyone really) should go for.

Capital Required: I’ve been asked about the issues with allocating capital for 7 open trades at once which I rarely if ever have. That is fair but I would argue that these trades require having margin available in a margin account. I personally use a bucket system for my investing and long/short tech stocks are just one part of that. Having a high quality dividend portfolio for example creates more than enough space for me to do my tech stock trades without requiring me to have unused capital. Clearly if someone had an account for these trades alone, it would create an issue.

Do You Further Questions?

I would love to hear them here! Thanks to everyone who has provided feedback, it is truly appreciated!