Weekly Recap: 21.08-25.08

Dear L.,

I would like to keep you updated on what kind of opportunities last week offered.

As you know, I am mainly looking for 2-3 setups which I want to trade. These are the setups, I feel the most comfortable with.

The first one is the rebound of a former runner. This setup usually concerns a stock that recently has sold off after appreciating strongly. After 1-3 red days I look for the rebound. Usually, the stock will sell off some more in the morning. Then however it will fail to make new lows and instead put in higher lows. That´s when I want to buy the shares in anticipation of the break of the morning high. My theory is that short sellers are crowded in this trade after the first red days. When the stock morning panics the shorts sellers will not cover yet. However, when the stocks fails to make new lows, some shorts start to cover, driving the shares up slowly. Finally, most of the bears have their stop loss at the high of the day, thereby reinforcing the spike when this level is reached.

For this setup I ideally look for stocks of a company with a low market capitalization and a low float of shares. This is because demand and supply dynamics can make the price of the stock move very quickly when shorts try to cover and momentum traders chase the stock upwards.

On Monday shares of Interpace Diagnostics Group, Inc. (IDXG) followed the setup. Previously, IDXG had gone from 80 cents to $1.5 in a matter of two days. After two days of selling off down to the $1.2 mark the bounce finally was due. In the morning, IDXG tried to spike, failed and instead sold off. Later, it put in its lows and grinded back towards the high of the day. Once This level was broken shorts got squeezed and IDXG spiked.

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Shares of Root9B Holdings, Inc. (RTNB) offered a similar opportunity on Monday. On Friday RTNB had spiked strongly before giving away most of its gains. After the weekend RTNB gapped down, failed to close the gap in the morning and sold off instead. It held support however and grinded its way up again. Then BOOM! It broke the high of the morning and squeezed the shorts. With a market capitalization of around $ 15 million and a float of just 4.4 million shares RTNB was the perfect stock for this kind of action.

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Finally, on Tuesday we saw one more bounce by Delcath Systems, Inc. (DCTH). After the crash from 24 cents to 12 cents the time was due for a bounce. Even though DCTH did not sell off in the first minutes of the day it did gap down. Then it went from 11 cents to 14 cents in the first hour of the trading day.

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Besides the bounce play, I like to trade OTC stocks breaking out to new highs. The pattern is as follows: The stocks usually nicely break out and finish strongly into the close of the breakout day. Often, shares gap up the next day.

Last week we had one nice breakout. Arch Therapeutics, Inc. (ARTH) broke out at the 72 cents mark and subsequently went to 86 cents. There are two things to note in this case however. First, ARTH  did not offer the gap up the next day. Second, the liquidity in this stock is not satisfactory at all, making ARTH borderline not tradable. Thus, the setup offered by ARTH was not perfect.

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This week I have a few tickers related to my favorite setups on my watchlist.

The first one is Bitcoin Investment Trust (GBTC). Obviously, the performance of this stock is strongly correlated to the one of Bitcoin. However, unlike other bitcoin related stocks which recently crashed when Bitcoin retraced, GBTC held its gains. If bitcoin breaks the $4500 level, GBTC could offer a very nice OTC breakout trade opportunity.

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Shares of Sequans Communications S.A. spiked from around $2.6 to $3.6 last week before two days of selling pressure. A bounce may be due. The relatively high market cap of $261 million and a share float of 64 million make the pattern less likely to work out however.

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Let´s see how this week turns out.

Best,

Nils

 

Weekls Recap: 14.08-18.08

Well, I can only quote myself here: What a week!

Last Friday we saw some very nice OTC breakouts. On the top of the watchlist were: OXIS, SING, BTCS, MGTI and NSRPF. On Monday the question was, if the typical OTC breakout pattern would work out  – it did work out incredibly well. There was huge profit potential and all stocks did follow the pattern to some extent. While all 5 stocks did gap up one has to mention that MGTI, SING and BTCS are all Bitcoin related stocks. Since Bitcoin gained heavily over the weekend, these stocks´ performance most likely was a result of this appreciation. Thus, betting on all these three stocks at the same time was actually just one single bet on bitcoin and did not offer much diversification. Later in the week when bitcoin stumbled these three stocks crashed together too.

But let´s have a look at the charts and this week´s other plays.

MGTI closed just above the breakout level of $1.4 on Friday.  On Monday it gapped up to the 1.6s and went to $1.8 in the first minutes of the day. After some consolidation it closed the day at $1.92.

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BTCS. Well, what can I say? What a move! Closing Friday at around 20.4 cents it gapped up to 25.8 cents on Monday. After peaking at 57.8 cents it still closed Monday at 42 cents.

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SING, closing Friday at 6.45 cents, on Monday gapped up to 7.5 cents and continued to 12 cents within the first hour of the day. It still closed the day at 9.8 cents.

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But even the non bitcoin related stocks performed very well. Biotechnology stock OXIS had closed on Friday at 5.2 cents. It gapped up to 5.85 cents, peaked at 8.5 cents and finished the day at the same level.

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NSRPF opened Monday at $3 after Friday´s close at $2.88. Throughout the day it spiked to a high of $3.7 before closing at $3.62.

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Additionally, on Monday we could observe a nice squeeze. CAPR, which has been pretty beaten down after its incredible move a few weeks ago, consolidated during the whole day. Then, when the high of the day finally was broken, it squeezed from $1.06 to as high as $1.3 – what a nice squeeze.

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Between Monday and Tuesday we saw the next breakout opportunity. Shares of LexaGene Holdings Inc. (LXXGF) broke out at 80 cents on Monday and closed the day at 86 cents. They opened at 87 cents on Tuesday, spiked to 90 cents and then sold off throughout the day. Additionally, liquidity was not favorable in this case.

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Furthermore, Tuesday offered a very little squeeze opportunity. ParkerVision Inc. (PRKR) is a technology company with a market cap of $33 million and a float of just under 16 million shares. Strong second quarter results made the firm´s shares spike from around $1.75 to $2.24 on Monday.  On Tuesday, PRKR sold off slightly, put in higher lows and then broke the high of the day at $2. It then “squeezed” to $2.1 – still a 5% move and we can see the accelerated price action.

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Wednesday brought us yet another breakout which continued the pattern on Thursday. Digatrade Financial Corp. (DIGAF), another company related to crypto currencies with a market cap of $10.3 million and just under 43 million shares outstanding, broke out at 21.7 cents, closing the day at 28.3 cents. On Thursday it gapped up to 30 cents before spiking to 39 cents. However, also in this case we have to be aware of the fact that this move probably was caused by the recovery of bitcoin. Thus, buying DIGAF was an indirect bet on how bitcoin would perform. Since Bitcoin trades 24 hours, holding a stock like this overnight is very risky risky – especially with the volatility that this crypto currency displays.

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The breakouts did not stop this week. Agritek Holdings Inc. (AGTK) is a company in the marijuana service sector. On Wednesday it broke out at 1.44 cents, closing at 1.86 cents. It gapped up to 1.92 cents the following day before selling off sharply down to 1.65 cents. However, it recovered and went as high as 2.4 cents on the day. Still, the opening action shows that these plays can be very volatile and risky.

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Friday brought another nice red-to green move play. Phoenix New Media Limited (FENG), a internet-media company, beat analyst expecations and subsequently spiked on Wednesday from $3 to almost $4. After closing Thursday without the price moving much, FENG on Friday opened at $3.8 and tried to spike before being sold off down to the low 3.7s where it traded for the first hour or so. Then, once more we saw an uptrend and FENG broke the high of the day at $3.9 and quickly spiked to $4.15 from where it continued its uptrend throughout the day up to a high of $4.81.

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Finally, we have yet another breakout play. Shares of  American Cannabis Company Inc. (AMMJ) broke out at the 80 cents level on Thursday before closing at 83 cents. On Friday AMMJ opened at 84 cents before it quickly trended up to the $1 mark.

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Next week I will be closely watching shares of Interpace Diagnostics Group Inc (IDXG) Unbenannt.png

and Delcath Systems, Inc. for possible bounce plays.

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Both have sold off after recent strong price moves on the upside.

Let´s see if they offer the much beloved bounce play.

Best,

Nils

Weekly Recap: 07.08-11.08

Let´s have a look at this week´s action. There will be a lot to talk about.

In the last weekly recap I put FNMA, MCIG, ARTH and PSGLQ on the top of my watchlist.

Firstly, FNMA still trades below the two strong resistance levels at $2.8 and $3$.

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Similarly, MCIG still tradeds below the resistance in the $2.7-2.8 area.

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ARTH, just trades below the 72 cents multi month resistance.

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PSGLQ did not move a lot either and given its liquidity the setup is not of a very high quality at the moment.

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A nice breakout that did happen was by The Pulse Beverage Corporation (PLSB), a company active in the beverage business with a market capitalization of just under $560k. Last Friday it broke out at 0.3 cents and peaked at a high of 0.6 cents on Monday.

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Similarly, shares of On The Money Systems Corp. (OMVS), which with a market cap of $13.6 million provides transportation services, broke out on Friday at the 21 cents area. After closing at 25 cents, OMVS gapped up to 26 cents and morning spiked to the mid 28 cents.

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Both PLSB and OMVS represent two very nice cases of the OTC breakout pattern, while the other four stocks on my watchlist did not reach the crucial price levels so far.

On Friday, AEZS once more spiked.

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After the gap up from the mid 1.7s to the mid 1.9s profits were taken on AEZS. Then, we saw a nice red to green move and AEZS spiked up to $2.3.

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Furthermore on Friday there were some very nice OTC breakouts and it will be interesting to see if wee get a gap up on these plays on Monday.

Shares of Oxis International Inc. (OXIS), a $7.6 million market cap biotech company, broke out nicely at the 4.3 cents resistance level and subsequently spiked up to 5.4 cents.

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SinglePoint, Inc (SING) broke out of its resistance at 5.4 cents and went as high as 6.9 cents. The company is active in the mobile technology sector and has a market capitalization of $49 million.

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Following the Bitcoin boom, shares of Bitcoin company BTCS Inc (BTCS) ($18 million market cap) broke out in the 14.5 cents area going to as high as 23 cents. If this breakout can continue most likely will depend on the Bitcoins trend in the following days.

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MGTI Capital Investments, Inc (MGTI) had its shares break out at $1.4, going as high as $1.47 and closing just above the breakout level at $1.44. The company has a market cap of $56 million and is active in the cybersecurity industry.

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Finally, shares of Novo Resources Corp (NSRPF) broke out very nicely at the $2.6 mark and went as high as $3. With a market cap of $335 million  this company in the basic materials industry belongs to the bigger and more liquid OTC plays.

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Let´s see how these OTC stocks play out next week.

Best,

Nils

The Economic Machine – by Ray Dalio

Ray Dalio, founder of the worlds largest hedge fund Bridgewater Associates, has a simple framework of how the economy works. He kindly shares this framework in “How The Economic Machine Works”. In his framework one can find many links to how Raoul Paul analyzes the global economy, as I discussed previously.

So let us have a look at Ray´s view of how the economic machine works.

The economy is a machine and it works in a simple and mechanical way. It is made up of many, many simple transactions which are repeated over and over again.  There are three main factors that have to be considered and which drive the economy. These three factors are:

  1. Productivity growth
  2. The short term debt cycle
  3. The long term debt cycle

(Remember Raoul´s view?)

Let´s start from the simplest part of every economy – transactions. An economy simply is the sum of all its transactions. In each transaction a buyer exchanges money or credit for the seller´s goods, services or financial assets. Therefore money and credit equal the total spending. Total spending is what drives the economy. It is a crucial measure. If you divide total spending by the quantity sold you arrive at the price of goods, services and assets. This is how you can evaluate inflation as we will see later.

A “market” within an economy consists of all buyers and all sellers of the same product, service or asset. The economy itself consists of all transactions in all markets existing.

The biggest and most important buyer and seller of an economy is the government, consisting of two bodies. There is the central government and the central bank. How do these two bodies influence the economy? Well, the central government influences through fiscal policy while the central bank controls monetary policy, it controls money and credit supply within an economy. It does so by setting interest rates and by printing money. Therefore, it strongly influences credit.

What is credit? We tend to think a lot in terms of money. But credit, according to Dalio, is “the most important part of the economy and probably the least understood”. In a second we will see why.

As we saw earlier, in every market there are buyers and sellers. The same counts for the credit market which consists of lenders and borrowers who make transactions in this specific market. Credit can help an individual to finance what she wants,  may it be consumption or investment in order to produce productivity. Interest rates, set by the central bank, strongly influence the supply and demand of credit. When interest rates are high, borrowing becomes more expensive and investments are required to yield a high rate of return in order to justify the financing costs. When interest rates are low on the other hand, credit can be obtained and financed easily and even marginally profitable investments may be undertaken. In this situation the economy may easily overheat.

But there is more to consider. As soon as credit is created, debt is created as well. Thus credit has two sides. It is an asset for the lender while it is a liability for the borrower. These assets and liabilities disappear only when debt is repaid or forgiven.

So why is credit so important? When a borrower receives financing, when he receives credit, he is able to increase his spending. As we saw earlier, spending is what drives the whole economy. Because the spending of one person is someone else´s income, more spending results in more income. More income on the other hand makes lenders more willing to lend. This is because of two factors. Firstly, the increased incomes makes individuals´ ability to repay debt increase and secondly the value of collateral secures the lender in the case of default

Thus,  when a borrower receives credit he can increase his spending. Spending drives the economy because everybody´s spending is someone else´s income. More spending equals more income. More income then makes lenders more willing to lend even more because individuals become more worthy of credit through the effects of increased income and appreciated collateral. Thereby, increased income leads to even more borrowing and more spending – a self-reinforcing pattern ensures. This is why we have economic cycles.

While productivity growth matters a lot for economic growth in the long run, what matters in the short run is credit and debt. This is because if we live above our means during one period we will have live below our means in subsequent periods when deleveraging takes place.

If we would not borrow, economic growth would only depend on productivity growth. But because we borrow, we do have cycles. This is because of human nature. To buy more than you can afford you have to borrow against your future self, which means that you will be able to spend less in the future, leading to cycles.

We have to be aware of the fact that credit is different than cash even though what people call money often actually is credit. Money is used when a transaction is settled immediately. Credit on the other hand represents the promise to settle a transaction in the future. Credit is not necessarily bad. It may be used to finance productivity enhancing investments. However it is bad when it finances over-consumption as opposed to investment.

So, as we have seen borrowing creates cycles. Everything that goes up most come down. This leads us to the short term debt cycle. With an increase of economic activity we see economic expansion. At the same time prices rise because total spending increases at a faster pace than the quantity of units, assets and services sold. Inflation is the result. If inflation reaches levels which are considered by central banks to be too high, it raises interest rates. This in turn leads to people not being able to borrow anymore and existing debt becomes more expensive. What results is the opposite of what we have seen before. There is less spending, resulting in less income. Instead of inflation, deflation occurs and the result is a recession. This is when interest rates are lowered again in order to stimulate the economy. Credit becomes easily available and we see another economic expansion.

We see how credit influences the economy. In the short term spending is only constrained by borrowers´and lenders´willingness to lend and borrow. If credit is easily available, an economic expansion takes place. When credit is not easily available, a recession is the result. This short term debt cycle in general lasts 5 to 8 years and happens over and over and over again during many decades. But when a short term debt cycle ends it does not lead us to the same level of debt at which we started the cycle. Instead, in general each cycle ends with more debt and more spending. This leads us to the long-term debt cycle.

In the long-term debt cycle “everyone thinks things are going great”. Credit leads to inflation of asset prices and increases of income. A bubble is created. At this point even though debt has been growing, income and asset prices have been growing at the same pace or faster. The debt burden has not deteriorated and people feel wealthy despite the huge debt (does this remind you of current times?).

However, this development cannot continue forever. Over decades and decades debt rises and debt repayments become larger and larger. Debt increases faster than income. In order to repay the increased interest expenses spending has to be reduced. We know were this leads us. Less spending leads to less income leads to less credit and so on. The result is a recession and maybe even a depression.

We arrive in the deleveraging phase of an economy. People cut spending, income is generally lower, there is less credit, asset prices drop which decreases collateral and the willingness to lend. At the same time the central bank may not be able to stimulate the economy with lower interest rates if interest rates are low already. The central bank faces the so called zero-lower bound (even though in the last years negative interest rates have been reality in many parts of the world in the central banks´ pursuit to encourage consumption).

As Ray puts it: “The difference between a recession (short term debt cycle) and a deleveraging (long term debt cycle) is that during a deleveraging borrowers´ debt burdens simply have gotten too big and can´t be relieved by lowering interest rates”.

At this point the economy is not credit worthy anymore. So what can be done about this situation? The conclusion is that the debt burden is too high and needs to come down. There are four ways through which the burden may decrease.

The first thing to usually happen is that spending is cut. We call this  austerity. Even though we expect this to decrease the debt burden, it actually results in the opposite outcome. Because spending is decreased, incomes fall even faster and the debt burden gets worse. This way of austerity is deflationary. Governments and businesses need to cut expenditure leading to higher unemployment. Consequently debt needs to be reduced. When debts are not repaid, people fear for the stability of banks and withdraw their cash. Bank runs result. Finally,  people, business, banks and even governments default on their debt – we arrive in a depression. This is when people realize that much of what they thought was their wealth does not really exist. The debt cuts, through its effects on the economy, actually lead to more decreased income and asset values. Consequently,  the debt burden increases even further. Lower incomes and less employment bring the central government on the plan which collects less taxes. At the same time however it has to service higher unemployed people and has to finance more stimulus plans. This in turn increases the national debt burden even more, leading to the third step. To finance the budget deficits redistribution is attempted next. The “rich” are taxed more heavily in order to finance increased spending. Redistribution may lead to resentment between the “haves” and the “have nots”. This may result in rise of populism, social disorder, national conflicts and even wars.

The last resort is the central bank which, even though interest rates are already at zero, has another tool in its tool kit. The central bank may print money. Unlike the first three approaches, austerity, debt reduction and redistribution of wealth, which are all deflationary, the printing of money is inflationary and a stimulus for the economy. The central bank prints money “out of thin air” and uses it to purchase financial assets and government bonds. Buy doing so it helps to drive up asset prices, supporting individuals holding financial assets. At the same time however, the government bond purchases allow the government to finance stimulatory fiscal policy. This increases government debt but peoples´ income too. The economy´s total debt burden decreases though.

The four measures introduced need to be balanced in an optimal way. Austerity, debt restructuring, redistribution of wealth and printing of money need to be in equilibrium. In this way a “beautiful deleveraging”, as Dalio calls it,  may take place. At this point debts decline relative to income. The debt burden consequently improves and real economic growth is positive.

 

But doesn´t the printing money create inflation? It will not if the printed money offsets credit. As we know already, prices depend on total spending on the one hand, consisting of credit and money, and the quantity of goods, services and assets on the other hand. If printed money replaces the disappearing credit inflation is not a problem. The key however is not to abuse this and print too much money, as did for example Germany during the Weimar Republic.

 

It takes an economy about a decade to make debt burdens fall and for the economy to recover again (the lost decade). This of course is a long period and may be very painful. So what can we do to avoid this painful process? What are the rules we should adhere to? There are three main takeaways from Ray Dalio´s framework.

  • Don´t have debt rise faster than income. Debt burdens ultimately will bury the economy alive.
  • Don´t have income rise faster than productivity.
  • Try to encourage a rise in productivity as much as possible.

All this nowadays seems to be very relevant if we think about debt burdens in Europe, the United States, Japan and even China of present days. But many policy makers seem not to have understood these fairly easy principles. Hopefully we will.

Best,

Nils

 

 

Weekly Recap: 31.07 – 04.08

Last week I wrote about CAPR and a possible bounce after the sell off of the 1.6s. After declining some more on Monday, there was a little morning bounce on Tuesday. At the beginning of the trading session there was the typical sell off before CAPR grinded higher. Then it squeezed a little from around $1.03 to $1.13.

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On Thursday, after a long strike of selling off, AEZS finally spiked again. Here we had a squeeze lasted considerably longer than normally. The “morning crash” was followed by a continuous uptrend throughout the first trading hour of the day. During this time AEZS went from the low 1.5s to almost $1.9.

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On Friday, AEZS continued its strong momentum and offered a nice red to green move. After some choppyness in the first minutes of the day it squeezed from $1.8 to $2.15.

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On the same day, biotechnology company Novan Inc. (NOVN) with a market cap of $64 million and a float of 9.28 million shares came back after days of losses. Even though it took the whole trading day, it bounced from around $4.4 to a high of $5.5.

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Finally, Friday brought another OTC pump crashing. Leafbuyer Technologies,  Inc. (LBUY), which as the name already suggests operates online platforms for cannabis deals, crashed pretty heavily after weeks of continuous gains. LBUY ´s shares fell from the 2.5s to the 1.6s before bouncing back to $2s – not the easiest bounce to trade.

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In the next days OTC stocks are on the top of my watch list due to anticipated breakouts.

Federal National Mortgage Association (FNMA) is a $15.4 billion company providing services in the mortgage business and you may be familiar with it because of its role during the financial crisis.

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Arc Therapeutics, Inc. (ARTH) is a life science medical device company with a market cap of around $100 million.

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mCig, Inc. (MCIG), at a market cap of $100 million, manufactures and distributes electronic cigarettes.

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And finally we have Old PSG Wind-down Ltd. (PSGLQ) which does not have any significant operations and is bankrupt – what a great investment 😉

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Best,

Nils