Flip Of A Coin

I just want to write a short summary on my most recent trade on last Thursday. The stock that I did trade was Clean Diesel Technologies, Inc. (CDTI) which is a technology company active in automotive emissions solutions. On Wednesday towards the end of the trading day this popped up on my scanner because it was close to its former high of around $3.54. However, late in the trading day it remained at a lower level of around $3.45 until the market closed. At this point I should have been buying the stock already. I in fact had been thinking about doing it. At this point CDTI 1. was close to a short-term breakout 2. had advanced much during the day 3. had closed relatively strong. All this made it likely that momentum buyers would jump in the next morning. There were good odds for a gap up and a morning spike. I remained gun shy however and did not buy overnight.

The next morning CDTI did gap up to $3.5 and immediately traded towards the upside. After it shortly broke out of its $3.54 high it bounced back and I bought at $3.53. After the dip it spiked right up to the $3.60s. There however, I saw a ton of sellers rushing in on the level two and I sold my position at $3.625. This turned out to be a good decision because CDTI retraced strongly, giving back all its gains and going as low as the $3.47s. At this point my stop would most likely have kicked in. Even though CDTI went as high as $3.7 on the day, I was happy with my small gains since the stock traded in a very choppy manner. In my opinion it did not offer many opportunities to trade.

CDTI

This does not mean however that everything was perfect. Analyzing my trades has shown me how short my holding period generally is. While there is the possibility that this kind of trading style fits my personality the best, it is my goal to hold stocks breaking out for a longer time. This means that I should be looking for stocks that do not trade in a choppy manner as CDTI tends to do.

After the past two green trades I am back to the point where my winning rate is 50%. Even though I am still down in terms of profits, my losses have decreased to the sum of transaction costs. This of course is not yet a compelling argument for my trading skills. I could basically just toss a coin to decide whether to buy or to sell, right? I do not know if this is true. After me analyzing my gains and losses my trades have actually improved in terms of myself following my plans and not buying at random points. Additionally, my confidence has increased. But the sample size remains fairly small and only the future will show.

I hope that I can continue on this more disciplined path in the future and eventually become profitable.

Until then let´s walk the path together.

Best,

Nils

Playing the bounce on CBLI

As I recently have expressed, there are chart patterns that repeat themselves over and over again. Yesterday, I spotted one sock offering a particularly interesting chart and decided to watch it more closely, finally trading it.

Cleveland BioLabs, Inc. (CBLI) is an US based healthcare & biotechnology company. With a market capitalization of 51.65 million and a float of only 4.42 million shares it perfectly fits my low market capitalization/low float criteria. CBLI recently spiked big after news of approval of its plans in Europe by the European Medical Agency. As we can see below, after another spike it had been retracing for two days before yesterday.

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So what is the pattern here? Recently we have seen that big gainers like this tend to bounce back strongly after 2-4 days of fading on low volume. Given this pattern, I of course did not know that CBLI would be strong yesterday but I had it on the top of my watchlist. My plan was to enter on a possible break out of the premarket high or a possible bull flag.

At the market open, CBLI gapped down slightly and opened strong, trying to spike. At this point my discipline got tested for the first time. Fear of missing out kicked in and for a moment I thought about buying at $3.97 in anticipation of the break of $4. However, since this was not part of my plan I decided to wait for the confirmation of the break out of the morning high. This turned out to be a good decision since the stock started a 30 minutes lasting downwards trend, going as low as $3.82. At this point I definitely would have been stopped out.

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Then however it happened. CBLI went from $3.83 up to $4.05 in just one minute. Even though it could not hold this level it continued strong in the next minute. At this point my system kicked in and I entered my position at $4, a good entry as it turns out. This level of $4 was crucial since it represented the switch of CBLI being red to green on the day, a psychological important factor.

From this point onwards however my decisions deteriorated. From other traders I heard that the spike was a result of pump in a different chat room. This alerted me and at the first sign of weakness I sold at $4.1 for a small gain. My holding time was only 2 minutes long! CBLI continued to trend up as high as $4.47. I should definitely have been able to ride at leas the spike up to $4.4.

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The exit in this trade represents a limitation that I am facing in my trading. My average loss is twice the size of my average gain. This would require me to have a huge win-loss ratio just to break even. So why does this discrepancy exist? The size of my losses is not the problem. Generally, my exits are well chosen (some entries in the past were not, as I elaborated on in the last post). The same goes for my position size. I have adjusted my position size to allow for wider stops, maintaining profit potential at the same time. The issue I will need to work on is that I have to “let my winners run” as they say in the trend following community. I have to be willing to give back a small gain in order to book the large gain. Especially in cases as yesterday, I have to stay in the trade if the chart and the tape indicate that the trend may continue.

The crux of the matter is that I do not only need a plan for my entries but more importantly I need a plan for how to take profits as well.

When the opportunity is there, I have to take advantage of it.

Best,

Nils

Analyzing losses

What I want to do today has been overdue for a long time. But I realized its necessity only after this week´s losses. In this post I want to have a look at my trades, the commonalities of the losers, winners and implement rules for the future. In doing so I hope to significantly improve the odds for better performance in the in the months to come.

At this point it comes in handy that since the beginning of this year I have been journaling every one of my trades. This allows me to judge my entry and exit reasons and see patters in my behavior.

In this day trading activity I made 8 trades this year which is mainly due to my university schedule. Nevertheless, I will have to practice a lot more and optimize the time if I want to improve in doing this. After winning 50% of the time, this week´s losses put me down to 37.5% winners and 62.5% losers. So let us have a look at them.

Random entries

In almost all of my loosing trades one pattern shows up: random entries. This means that I bough the stocks at a price which, given the chart, did not offer an advantageous return/risk. This leads back to the fact that in these situations I did not have a 100% clear plan beforehand. This allowed me to build up fear of missing out and jump in at sub optimal points.

My first trade of the year already represents this pattern. In this example I traded DRYS. On the chart below you see my entry at $5.99. Why the hell did I enter there? Sure, it was up-trending. But it had not broken out of its premarket resistance at $6.2 and actually already had topped there twice. Let alone that I do not like that I traded premarket, which can be justified in some cases, this was just an entry in mid-range. It was neither a a justifiable dip-buy nor a breakout. It was just a random entry. And surely, when the market opened DRYS tried to break the $6.2 level and failed miserably for the third time, this time for good!

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Next one on the list is IMMU. This was the second trade I made on this stock with the first being a winner (we will observe the setup later). But the previous trade being a winning trade actually negatively influenced this my second trading activity. Before, given the opportunity that had been presented, I had extracted a profit that was minuscule compared to what would have been possible and therefore I think that I wanted to make more profit on IMMU this time. Mistake nr. 1!

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I did not buy premarket but I was incredible two minutes more patient than compared to the DRYS case. I thought IMMU would open strong and had had the plan to buy when it would break out of the morning high. Instead, when the market opened, IMMU dropped. Given the positive news I decided to dip-buy the stock. This, under some considerations may be justifiable. But my execution once more was hasty and unprepared. Mistake nr 2: dip-buying was not a possibility that I had included in my plan. Therefore, I should not have executed the strategy. Mistake nr. 3: I did not even wait for a second let alone third candle but directly jumped into the trade. I could at least have waited for some signs of IMMU bottoming. Mistake nr. 4: because my position size in the prior trade had been too small I increased my position size in this one. However, the position size should be adjusted according to the pattern. Given the fact, that dip-buying into a morning sell-off is more risky, I should have gone in smaller here.

Looser number 3 was CNAB. My biggest looser the year. The randomness comes back again! It is incredible how often greed makes me buy exactly at the top. It is almost funny if it would not cost me money. Also in the case the stock started strong, I had no clear entry rule and I chased an upwards trending stock. The rest is history. Totally random entry!

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This leads us to this week´s super performers. The first one was CYCC. Below you see the chart and my entry.

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By now it should be clear that based on my intentions, I should actually reverse my trades and rather short when I am bullish on a stock. Once more I bought almost at the top of the move. Random entry nr. 3! Yuhu! (don´t worry, there will be another one). This was especially painful since my hypothesis in this trade was 100% correct and I could have made a big profit. CYCC had recently spiked excessively but subsequently had had three losing days. This pattern shows up over and over again. And the latest after the third day, CYCC was expected to rebound. And it happened. But I, watching a different stock, missed the perfect entry opportunity, then felt angry at myself for missing it and chased. Well, the outcome was semi-positive!

The last loser is IMLFF. Guys, seriously! Writing this post is so much fun. I am sitting here laughing in disbelief about the stupidity of some of my entries. Very entertaining stuff! Long story short: I entered almost at the TOP! I had expected the morning spike, was disciplined enough not to jump blindly into it, but when it occurred it was painful to sit at the sidelines and yeah, I kinda bought again at the top.

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Conclusion: WOW! All (!) my losses lead back to one commonality. Optimizing this may increase performance a lot and I will explain later what my plans are. Now let us have a short look at the winners.

“LONGS”

Firstly, it is interesting to mention that I held my winners considerably longer than my losers, often overnight.

The first winner was IMMU which represents a two sided coin though. My entry was well chosen. I bought the breakout of the morning high. A perfect entry in my opinion. One can argue about my exit at $ 5.1. This depends on the time frame one trades on. However, I would like to be more patient and sit through small consolidations. Hence, I think that I sold too soon. If I choose to trade the very short term and thus basically scalp however, I need to take more of the entry opportunities that IMMU presented in the minutes following my sale. After short pullbacks it repeatedly broke out and continued its uptrend. This pattern, called a bull-flag, is something I will focus on more in the future.

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CBAY was another winner I had more patience with. It followed one pattern that presents itself repeatedly and which I want to focus more on. Towards the close it broke out of a resistance level holding for a long time. I bought into this breakout and held overnight. The next morning CBAY did what stocks like this do often. It gapped up, opened strongly and I made a nice profit.

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Finally, CTXR was another overnight buy based on a slightly differing pattern. This stock had had a very strong up-day with almost 20%. Generally, CTXR is very illiquid. However, when spiking on increased volume it tends to gap up and morning spike the following day. Anticipating this happening again, I bought CTXR into the close with a small position size given its limited liquidity. The next morning history repeated itself.

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Consequences

What I take from this analysis are some critical lessons.

  1. If a given scenario is not included in my plan, I will not trade the set up. For example, dip-buying a stock that I had wanted to buy at a breakout without even thinking about a possible dip and evaluating it beforehand will not happen anymore.
  2. Considering and up-trending stock, there are 3 possible entry options: breakout out of the morning/premarket high, bull flag breakout, buying an intermediate established (!) dip on an up-trending stock.
  3.  My position size has to be adjusted to the level of riskiness of the given pattern.
  4. I will gladly hold breakouts overnight (especially OTC breakouts).

Writing this entry was actually very educational (and painful – facepalm) to me. Hopefully, I will be able to incorporate my new rules.

Best,

Nils

 

Recap on IMLFF

Hi there,

just for transparency purposes I want to write a short recap about yesterday´s trade. I had another red day on Tuesday. Yeah, the last two days haven´t been too satisfactory.

What I had planned to trade and ended up trading was IMLFF. The stock has been very strong recently and I thought that it could break out to new highs. When analyzing the behavior of the stock I realized that it usually does have strong morning spikes. At this point I considered to buy it at the market open to sell into the morning spike. However, I wanted to be more conservative and agreed to buy in the 70 cents area in anticipation of the breakout at 72 cents.

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Daily Chart: IMLFF

Upon market open IMLFF did morning spike almost 10%. It went to just under 71 cents. At this point I was in a dilemma. I did not want to chase the stock but I wanted to buy before the breakout. So, I bought when there was a little pullback to 70 cents. As so often however, after I bought the stock started a continuous downtrend and after some minutes I got stopped out at 64 cents.

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1 Minute chart: IMLFF

IMLFF finally regained some of its losses and I still think that it may very well break out this or next week.

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Daily Chart: IMLFF

Even though I am satisfied that I did follow my laid out plan yesterday, I seriously have to consider my entry points. One of the patterns emerging with my trading losses is that I almost always buy close to the high. After I buy, the stock often starts its decline. This indicates, that I chase too much. Consequently, I have to approach buying shares differently and I must choose prices offering a better risk/reward such as stable dips or short term breakouts early in the move.  Let´s hope the future will bring betterment.

Best,

Nils

Execution is key

Having the right investment thesis is not sufficient. Trade execution is crucial. When and how you enter is important. This sounds logical but it is something I seriously need to consider after today´s trade.

One of my top watches today was CYCC. This stock follows the pattern of many other big movers we have seen recently. After 2+ days of ridiculous price appreciation, much of the profits were given back again. These stocks however tend to rebound after 2-3 days of losses. So my plan was to profit from this up-move.

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The level of $ 5.8 had held consistently during the past days and so my plan was to buy CYCC at support. In the first minutes of the market open I watched a different stock and when my attention turned back to CYCC, I saw this:

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Within 5 minutes CYCC had spiked from $ 5.8 to $ 7.24 and I was not in the trade. That´s what seriously upset me, leading to my mistake. When the stock retraced I saw this as the possible basis for another big up-move. However, at this point CYCC already had advanced 20% and was already overextended. I did not keep this in mind. Instead, I entered at $ 7.14. The stock soared to $ 7.24 but could not go higher. Within one minute CYCC went below $7 and I was out at $ 6.8.

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Later in the day, CYCC tried to regain its highs but failed and currently trades at $ 6.42. Once more, my losses were related to an ambiguous trading plan and the fear of missing out. This is something I will seriously work on before trading again!

There is one more thing to mention. As announced, I entered my OLLI position today. I bought shares at $ 34.2 and put my stop below $ 32. Let´s see how it goes.

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Best,

Nils

Good Stuff Cheap

ollies-bargin-outlet-logo_largeHi there. It has been a few weeks.

Today, for the first time I want to provide a more detailed analysis of a stock that I am following and which I think offers an good investment opportunity given both its exception past performance and fundamentals.

Meet Ollie´s Bargain Outlet

The company I will elaborate on is Ollie´s Bargain Outlet, an American extreme value retailer which had its Initial Public Offering in July 2015. Its business model is to sell brand and no name products at drastically reduced prices through in 234 stores across the United States. 70% of the products offered are brand products and the remaining 30% are private label products. Merchandise is priced 70% below department store levels and 20%-25% below the prices of market retailers.

The original premise of Ollie´s Bargain Outlet when it was founded in 1982 was that “everyone loves a bargain”. This still holds true nowadays. Under the motto “Good Stuff Cheap” Ollie´s Bargain Outlet targets a wide varieties of customers from all demographic and social classes. In fact, the business model allows continuous profits in both strong and weak economic cycles. It not only offers products at reduced prices but a special shopping experience too. Through continuously varying merchandise and product offerings the stores offer a “treasure hunt” shopping experience and the slogan “When it´s gone it´s gone” induces a sense of urgency to buy NOW before the good stuff is sold out.

The variety of products is large, feeding into the treasury hunt experience. As one can see below, from food to books to electronics one can find something in every product category.

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Source: Ollie´s Bargain Outlets Annual Report 2016

Despite its low-price profile, the company mostly profits from a loyal costumer base. Through its “Ollie´s Army Customer Loyalty Program” as of early February 2017 it reaches 7.3 million clients, an increase of 31.2% compared to the previous fiscal year. This is especially striking and advantageous since members of the loyalty program tend to spend approximately 40% more than an average customer.

As will become even more clear later on in the analysis, the company has been able to grow strongly in past years. Continuously more stores have been opened and net sales have increased both based on a comparable store and a non-comparable store basis. Comparable store sales increased to $ 736 million in fiscal year 2016, an increase of 3.2% compared to the previous year. This statistic is important because it highlights the fact that sales not only increased because of new store openings. Instead, existing stores are able to sell larger volume too. Non-comparable store sales increased from $ 49 million in fiscal year 2015 to $ 154.3 million one year later. Below, growth figures for both store openings and sales growth are represented.

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Source: Ollie´s Bargain Outlets Annual Report 2016

Ollie´s growth strategy consists in the expansion of the store base across the united states, the increase of product offerings and leveraging the Ollie´s Army loyalty program.  Below, one can see that currently the company is only operating in the east of the United States. According to a research report however, there is demand and capacity for 950 Ollie´s stores throughout the country. Given the fact that there are only 234 stores as of this writing, there seems to be ample opportunity to grow towards the west. This fact is important because Ollie´s efficiency in operating its stores is impressive. The average store has a size of 25000 to 32000 square feet and there is ample supply of real estate at low prices fitting the store requirements. Generally, the opening of a new store requires and initial investment of $ 1 million and the average payback period amounts to 2 years. Within the first 12 months of operations, the average store produces sales in excess of $ 4 million.

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Source: Ollie´s Bargain Outlets Annual Report 2016

Ollie´s Stellar Financial Performance

We already have seen that sales have trended strongly in the last years both due to increased sales in existing stores and new store openings. At the same time, other important financial measures such as Earnings Before Interest Taxes Depreciation and Amortization, Net Income and Earnings per share have demonstrated impressive movements too.

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While increases in revenues are a good sign, what finally matters are earnings. And as well in this category the prospects are strong. Income has been increasing a lot and especially Earnings per share have seen a stellar growth. What is even more appealing is the fact that EPS growth has been accelerating too. What makes stock prices move at last are earnings and especially the earnings per share growth is an important indicator for the stock´s future direction.

Strong growth is a good indicator but strong growth while beating analysts´ expectations at the same time is even better since expectations will be adjusted upwards and additional attention will be created for the stock. As we can see below, quarterly earnings per share have been continuously rising in the last fiscal year. At the same time, analysts expectations were beaten in every quarter.

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An increase in earnings may very well just be the result of higher sales. However, the overall profitability for the company has experienced a strong improvement as well as can be seen below. Additionally, these margins generally are above industry average and median.

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Another factor that is important to be considered is a retailer´s efficiency in selling its inventory. For this purpose the “days inventory” measure is calculated. One can observe, that the days inventory have been decreasing between 2015 and 2016 which indicates that less time is needed to sell the merchandise. Additionally, the days receivable measure shows how long it takes to collect receivables. Even though this measure has increased in the last year, the days receivables are less than one day which seems to be of no concern at all.

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Valuation

So, after all these digressions on how awesome the company is let us consider whether the stock is actually a buy. Ollie´s Bargain Outlet currently has a market capitalization of $ 2.04 billion and the stock trades under the ticker Olli at  $ 33.6. To get a first impression of relative over-valuation or undervaluation it is a good idea to compare the company to its peers. For this purpose various “similar” companies from the same industry are chosen and their EV/EBITDA, margins and EPS growth during the last five years are displayed below. The EV/EBITDA measure may be taken as an indicator of relative over-or undervaluation. It shows at what multiple of EBITDA the entire enterprise, both debt and equity, is trading. Looking at this measure we see that Ollie´s multiple is double both the industry average and the median. Based on this measure the company seems grossly overvalued.

But is this all to look at? As we have seen previously Ollie´s Bargain Outlet has performed exceptionally well in the past both in terms of earnings growth and efficiency improvements.  If we compare Ollie´s margins and EPS growth to the ones of its peers it becomes apparent that it outperforms the peer group in every category. Only the EPS growh over the past five years is less than the peer  group´s average one due to one outlier having an annualized growth rate in excess of 300%. As we see from the median however, Ollie´s growth is exceptional in this category too.

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Given these completely different characteristics, it seems difficult to evaluate whether the high EV/EBITDA margin implies over-valuation or whether the strong past performance and profitability even implies undervaluation.

In order to obtain a better understanding of the intrinsic value of the company, therefore an intrinsic valuation is built.

For this purpose I apply a 6-stage growth model. After two years, earning growth is expected to gradually decrease from the current average level of the past years (26%) to the stable growth rate of 2%. The value of the company is then calculated as follows.

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In order to discount the cash flows, the cost of equity is calculated via the CAPM model. As risk-free rate the 12 months US government bond yield of 1.06% is chosen. The company´s beta is constructed with a bottom up approach. Given the unlevered industry betas of various retail sectors Ollie´s unlevered beta is computed by weightings according to the its shares of the product categories. Then, the unlevered beta is relevered with a Debt/Equity ratio of 30% and a tax rate of 37.9%.

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Given the unlevered beta of 0.823, a D/E ratio of 30% and a tax rate of 37.9% the levered beta can be calculated as follows.

βl = 0.823(1+(1-0.379)*0.3) = 1.023

The current implied equity risk premium  for the United States is 5.69 %.  Thus, the cost of capital for the high growth period is

ke = 1.06% + 1.023* 5.69% = 6.88%

Assuming a long-run beta equal the on of the economy, in the stable growth period the cost of equity reduces to 6.75%. (1.06% +1*5.69%)

Given all these factors the discounted cash flows can be calculated and  a value per share of $ 44.94 is obtained. Trading at $ 33.6 the stock would trade at a strong discount to intrinsic value.

Investment Risks

There are various risks for Ollie´s business model and the accuracy of my analysis.

  • The discounted cash-flow analysis is based on various assumption. It is especially sensitive to changes in growth rates. I have assumed further strong growth in EPS for the next years. Even slightly adjusting these estimates downwards can strongly affect the intrinsic value of the stock.
  • The simplified usage of earnings per share employed in my calculation instead of dividends or free cash flow to equity may considerably influence the obtained result.
  • Operating leases have not been transformed into debt in my calculation, possibly influencing the outcome.
  • The business model of Ollie´s Bargain Outlet is reliant on the continuous availability of cheap merchandise. The company purchases overstock, discontinued merchandise, cancelled orders, excess inventory and buybacks from retailers. It has over 1000 suppliers and no one supplier has a larger share than 6%. Nevertheless, the company is reliant on the supply of cheap products. The lack of these would pose a severe challenge for the business.
  • The company always faces the risk of not correctly anticipating customers´ product demands.
  • Increased competition from other retailers.
  • Due to cost awareness, Ollie´s Bargain Outlet does not possess online retailing capabilities. It may be possible that online retailers will take away market share from the company.
  • There exists the risk that the customer loyalty program may fail to retain customers in the future.

Keeping all this in mind, I am very enthusiastic about the prospects of this company. While I have no position in the stock so far, I might enter soon.

Until next week.

Best,

Nils

Please keep in mind that I am not a professional investment advisor. The previous article is for entertainment and educational purposes only. The content is no investment advice and should not be regarded as such under any circumstances.