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Frontline’s “Market Meltdown”

http://kossik.com/images/PaulsonBernankeSenate.jpg

They will go down in infamy.

If you missed PBS’ special on the Market Meltdown I’m posting it here.  It’s a real good history lesson on America’s collapse in the credit market.  It covers every major failure, bailout, and meeting conducted during those/these times of crisis.  The scary thing is that, as I was watching, I felt like this show went to air a little too soon.  I mean, it seems like Frontline is talking about the credit crisis as if its already part of history.  Hmmm… I got news for you news-people… this is the present.

Very interesting perspective on the video.  It ties in everything you need to know- from the housing market, to the credit market, to the bank failures, Lehman, Fannie Mae, AIG failures and more.  It kind of blames Frank Paulson and Ben Bernanke for everything.  That’s a little unfair since the blame should go a little further back to the misuse of credit by consumers and the delinquent loaning by creditors.  Whatever.  Video takes us back to the first meltdown… Bear Stearns.

Anyway, grab some popcorn and enjoy the video.  Actually, it probably would have been appropriate to air this thing on Friday the 13th.

TIMELINE

  • First Tremors– Bear Stearns exposed to toxic sub-prime mortgage market. Rumors spread.  Stock falls.
  • The Deal to Save Bear Stearns–  Paulson and Bernanke fear “systemic risk” in Bear’s crisis.
  • Next Crisis:  Fannie Mae, Freddie Mac–  People still buying homes thinking they’ll be instantly rich.  Idiots.  Suddenly, fears of toxic assets spreads to world’s LARGEST mortage lenders.  Paulson forced to nationalize both.  Ooops.
  • Let Lehman Fail: One day after Fannie Mae/Freddie Mac, September 8.  Lehman, one of WallStreet’s oldest companies, thinks it will get help like Bear Stearns, but Paulson, ignores systemic risk and out of “moral hazard”, tells CEO to figure it out themselves.  OOOOOPS.  LEH stock melts down.  Bernanke bails out AIG.  World’s largest insurance company is nationalized.  What the?!
  • Market Begins to Crash, “Red October”: 2 days after Paulson lets LEH collapse, the market responds and drops hard.  Hmmmmmm.  Bernanke starts to panic so he teams up with Paulson to come up with a WHOLE SCALE BAILOUT on financial system.  Instead of taking it at a case-by-case basis, they bring idea to Congreass to create that infamous and epic $700b bailout.  This idea of a “blank check bill” comes as so radical to many conservative House Representatives and the bill is rejected.  As the bill gets more and more “nays” aired on TV, the Dow Jones enters into PANIC MODE.  Market starts to crash.  Those in the House voting against the Bill can only sit and watch now.  Dow drops -777 points making it the single largest decline point-wise in the Dow’s history.  I clearly remember that day.
  • The Contagion goes Global: Markets around the globe go haywire.  Iceland is bankrupt.  Ireland banks go south.  China’s growth fizzled.  Paulson tells 9 bank CEO’s governement’s taking a central role in financial system.  Trillions of dollars have yet to be spent to “fix” this problem.

… very interesting timeline and development.  Stop and think, where do we stand now?  It’s a little frightening to think or imagine what lies ahead.  I can only hope that the worst is behind us, even though I know hope in this economy is the weakest weapon we got.  I’ll leave it to you to decide what chapter we are in, in this sad story about the worst financial crisis since the Great Depression.

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Beware of the LOL-Pattern

The LOL-Pattern is basically a failed WTF-Pattern.  In other words, you get one of those WTF spikes, but suddenly it reverses and the entire spike is erased.  It makes you just laugh, whether you held long or short into that pattern.  At the end of the LOL-Pattern, Bulls are like, “whatever, I broke even”, then laugh.  Bears are like “Whoa, that was close. I almost lost my profits.” Then they laugh. Even those on the sidelines are like, “whoa, glad I didn’t buy that rally” then they laugh.

We had a nice LOL-Pattern in the final 32 minutes of trading.

These LOL-Patterns usually occur after important announcements, ie Fed rate cut/hike, Stimulus announcement, etc.

You must avoid the LOL-Patterns if you’re a day-trader.  Swing traders, just ignore them.

Speaking of LoL…

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Life Partners (LPHI) Update: Short Term Squeeze Alert

http://blog.miragestudio7.com/wp-content/uploads2/2007/09/dilbert_fist_of_death_comic_angry_presentation_crits_architecture.jpg

LPHI continue to be an interesting “story-stock.”  Remember, this stock has broke down after creating a topping pattern, then very near the breakdown, Citron makes heavy claims against the company.  Add Cramer’s bearish comments on Thursday to add to the panic sell, and we have LPHI at oversold levels.

Chart for Life Partners Holdings Inc. (LPHI)

I definitely would not short here.  I’m actually looking for a possible squeeze in this stock since its a money making company that should do well in recessions.  Therefore, what I’m looking for are any meaningful rebuttals against the claims and red-flags that were hastily raised on this stock.  I almost feel like this stock was bullied on.

  • Here is something from Motley Fool’s Caps Community covering Andrew Left of Citron (remember StockLemoncom?).
  • One other thing to note about LPHI’s selloff…  Andrew Left’s successful taking down of ArthroCare (ARTC) recently is VERY FRESH in investor’s minds.   It took him almost two years for ARTC to finally collapse.  I think no matter who Andrew Left picked on, people were going to sell that stock.
  • Cramer actually liked LPHI before.  Now he is suddenly bearish?  Cramer is definitely riding the Investors.com and Citron call on this one.  He knows NOTHING about technical analysis.

Here is a Q&A response to Citron’s Research and Cramer.  It is only fair that we hear LPHI’s side of the story. This is from their website. LPHI’s PR has been trying to contact me after blogging about LPHI last week.  Basically, they have provided me with the same info.  It’s an interesting Q&A but you can decide if it’s powerful enough:

Background:

On February 11, 2009, an online blog entitled “Citron Research” issued a negative report about Life Partners Holdings, Inc. The author of this report, Mr. Andrew Left, is well known as purveyor of negative information in order to successfully short trade the stocks on which he reports. Consequently, on the day that the Citron Research web posting was made, LPHI’s stock traded 1.2 million shares or just under 10x its average daily trading volume. We would hasten to point out that unlike legitimate stock research firms; the opinion posted to the Citron Research site was written and posted without the benefit of any contact with Life Partners or a history of covering the life settlement industry. Consequently, the author’s research and conclusions are incorrect because the report is based on faulty assumptions, misinformation or statements not borne out by fact.

NOTE: We believe that the ability to short is a legitimate option for investors and provides a useful function in our capital markets generally, but that the practice is also open to abuse when deliberate misinformation is propagated for the benefit of few and at the expense of other shareholders.

Questions/Answers:

Q. What is Citron Research?

A. Citron Research positions itself as a legitimate stock research house, but is actually just a Web site run by Andrew Left, a well known short seller who actively targets small-cap stocks. A 2008 review proudly claims that “8 of the 11 stocks Citron covered performed worse than even the adverse market of 2008. Only 1 of the 11 is trading moderately higher than when we first reported it (HEV), and we do not believe that will be for much longer.”

Q. Where did Andrew Left get his data for the Life Partners report?

A. This report was written and issued without the benefit of any contact with Life Partners or a history of covering the life settlement industry. The author’s research and conclusions are inaccurate because the report is based on faulty assumptions and misinformation not borne out by fact. (attack on the attacker)

Q. One of Mr. Left’s major points is about LPHI’s fees being higher than other life settlements companies? Is this true?

A. LPHI is the only publicly traded life settlement companies operating today. As a result, Mr. Left used a single line in our own public filing to propagate a complete fabrication. As disclosed in our last 10Q, our net revenues for the 9 months (exclusive of cost of revenue) were $39,919,000 on face value of $564,630,481. This equals fees of 7% of face. Hardly what most would consider egregious and well in line for companies with specialized knowledge that are paid on a success fee basis.

You can do the math yourself using information from our 10Q for the 9 months ended November 30, 2008 at page 16:

The following table shows the number of settlement contracts we have transacted, the aggregate face values of those contracts, and the revenues we derived, for the periods ended November 30, 2008 and 2007:

Periods Ended November 30, 2008

Periods Ended November 30, 2007

Three Months

Nine Months

Three Months

Nine Months

Number of settlements 56 154 52 153
Face value of policies $195,459,950 $564,630,481 $125,897,330 $293,303,574
Average revenue per settlement $501,856 $502,148 $371,129 $356,365
Net revenues derived* $14,246,000 $39,919,000 $9,874,000 $27,372,000

*    The revenues derived are exlusive of brokerage and referral fees.

As you can see, $40MM / $564 MM = 7%, not 14%. Of course, market forces may permit us to increase our margins somewhat, but there is no question that 7% is sustainable and the continued growth in the market means that we should continue to experience sustainable growth as we have previously said.

Also, it’s only because of LPHI’s extraordinary transparency that these fees are made public. We’d like to know the sources that Mr. Left used to cite “industry norm” fees of 6 percent. No other life settlement company publishes audited fee structures.

Unlike mutual funds, hedge funds or other derivatives, LPHI’s business model is the most cost effective way for accredited investors to own life settlements. LPHI does not charge any annual management fees or share in the profits of investors. As noted by Conning Research & Consulting, Inc. “This approach . . lowers their investment costs because they do not pay management fees to a portfolio manager.” Life Settlement Market: Increasing Capital and Investor Demand 2007 p. 56.

In addition, because its retail clients have direct fractional ownership of policies, they are insulated from any fund management risk. In other words, hedge funds are a “black box” while LPHI’s transactions are a “glass box.”

Q. Is LPHI’s business model sustainable?

A. Not only is the business model sustainable, LPHI is poised for significant growth across the next 10 years. A 2007 Conning Research & Co. predicted that gross market size of the life settlement industry will grow to $150 billion by 2016, from an estimated $7 billion that year. The company fundamentals behind LPHI have not changed in any way and earnings continue to be on course to meet expectations.

Q. Citron calls out the accounting firm that provides auditing services to LPHI as being a small and inexperienced working with publicly traded companies. What company currently serves is LPHI’s auditor and is it reliable?

A. Citron is in error about the company’s auditors. As of August 1, 2008, the firm it discusses merged with Eide Bailey who now serves as the company’s auditors. Eide Bailey is one of the top 25 accounting firms in the nation with over 39,000 clients and 20 offices in 9 states.

Q. Are life insurance companies currently in danger of bankruptcy?

A. Life insurance companies are among the most heavily regulated companies with regard to solvency. Like most financial institutions worldwide, insurers have recently suffered unrealized losses on their balance sheets and their earnings have suffered in the wake of the financial crisis. However, most experts agree that insurance companies do not have the liquidity issues that banks have. LPHI only acquires policies from insurers that have an A- or better rating, per A.M. Best & Co.

Even during the Great Depression of the early 1930s, life insurance companies continued to pay its policy obligations and there is no credible evidence to suggest otherwise today.

Q. Is LPHI under attack from state and federal regulators?

A. Mr. Left cites excerpts from allegations by Colorado regulators to support a “doom and gloom” conclusion for the company. However, had Mr. Left been intellectually honest he would have reported that this action has been resolved as reported in the company’s last 10-Q and that despite the initial claims of the Commissioner’s complaint, there was no finding of fraud in the Court’s order. Also, that the Colorado Securities Commissioner acknowledged and stipulated to the court that “no investor has alleged or asserted any impropriety against LPI with respect to their investment and all purchasers represented themselves to be accredited investors prior to investing.”

Because life settlements are a relatively new class of asset, there are complex and sometimes contradictory regulations between states and the federal government. LPHI has been working with state and federal regulatory agencies throughout its existence to develop rules which make it easier for senior Americans to unlock the hidden value in the insurance policies.

For example, the company filed a case in federal court to clarify whether it was constitutional for Florida state regulators to limit Florida residents’ ability to go outside the state and sell their policies to Life Partners in order to get the greatest value.

In every case brought against LPHI, these actions have been resolved, without any findings of fraud or other improprieties. These previous actions were brought due to a limited public understanding of a completely new asset class and as education continues these actions will diminish drastically. LPHI has been operating successfully for almost 20 years.

Q. What about the questions about LPHI’s CEO, Mr. Pardo? Was he sanctioned by the SEC in a previous company?

In a case relating to a revenue recognition reporting issue which arose based on the advice of accountants, Mr. Pardo entered into a consent decree with the SEC. In that order, there were no fines, penalties or other sanction imposed and Mr. Pardo entered the agreement in order to resolve the issue amicably.

No such accounting issues exist with LPHI or any other member of its senior management team, and Mr. Left does not assert that one exists. LPHI has operated successfully for nearly 20 years and in full compliance with both industry and securities regulations.

Q. Why don’t more analyst firms cover LPHI?

A. It is well known that the vast majority of small and medium capitalization companies have no analyst coverage whatsoever. This situation is driven more by shrinking research departments and the names they cover than with the individual merits of a company such as ours. But Citron’s information is wrong on this point. Life Partners recently announced that subscriber-based Singular Research also covers the company.

Q. Why aren’t there more companies doing life settlement? Should the lack of competition raise red flags for investors?

A. As discussed recently during one of our shareholders conference calls, competition for policies has decreased due to the fact that many of LPHI’s competitors utilized leveraged strategies. With the credit crisis that started in 2008, many of these companies simply ran out of money to purchase policies. This speaks more to the vindication of the company’s operating strategy and prudence, something left out of Mr. Left’s opinion piece.

Q. Why has the mainstream business media picked up the “Citron Research” report and cited it as a legitimate news source?

A. Several news organizations have mentioned the Citron piece as a credible news source in reporting LPHI’s turbulent trading. We are baffled by this development and feel that had the media done any research into Mr. Left’s organizations, they would have been more careful about reporting his Web site as a legitimate news source. Other, more prudent news organizations have acknowledged that Citron Research offers no evidence of anything more than one individual’s opinion.  (attack on the attacker)

Of particular interest is CNBC’s Jim Cramer who, on September 4, 2007, proclaimed LPHI to be a: ‘Miraculous company. … They’ve created a secondary market in life insurance. It’s a brilliant business model. I liked it before, and I like it again.’
http://www.cnbc.com/id/20585596/
http://seekingalpha.com/article/46399-jim-cramer-s-mad-money-lightning-round-picks-9-4-07

Above the comments:

LPHI is a momentum stock that has turned into a “story-stock.”  I’m sad to say, that straight up trend up LPHI enjoyed throughout 2008 like a bullet-proof stock, is done.  The easy trend is done.  Therefore, I would treat this as a “story-stock.” That means, you want to trade the imbalance, the rebuttals, and the panic (either panic selling or buying).  I think it’s very dangerous to short LPHI here.  I’m looking for a bounce soon, however, that doesn’t mean I will buy this stock in the same way I would if it were 2008.  Remember, broken momentum stocks almost never get back to their peaks.  Also, be careful about going long… we don’t know the bottom, so just wait for an intraday reversal if you’re unsure.

So, read the story and the debate.  Enjoy Citron, Cramer and Mr. Left try to tear LPHI up, but don’t fall in love with this stock long or short.  We play this until the hype is over.  I still think LPHI business model is a money-making machine.  It’s not vulture investing at the strictest definition; but I think it opens the way for our growing baby-boomer population to tap into future assets… and now more than ever do they need that money after many baby-boomers saw their retirement funds get wiped out in 2008.  In a sense, LPHI likes to “buy the panic” too.

Let’s see if LPHI can cheat death.

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StockTwits Recommends…

… that you surf the markets. Lol.

This is cool.  I just made StockTwits recommended Twitters list.

http://www.stocktwits.com/recommended

Don’t have a Twitter account?  Get one here.

Now check out the rest of the iBankCoin team…

 

iBankCoin iBankCoin

 

 

  • Links to articles on iBankCoin

Danny iBC Danny_iBC / Danny iBC

  • daily updates on broad markets

WeeklyTA WeeklyTA

  • intraday updates on broad markets.  Searches for technical patterns

Woodshedder Woodshedder

thehawaiitrader thehawaiitrader

RaginCajun RaginCajun

alphadawgg alphadawgg

The_Real_Fly The_Real_Fly

  • will humor you..  You may laugh, but there’s some guidance there

Other StockTwitters I recommend with blogs are…

Andy Swan AndySwan

  • Posts trades intraday frequently.  Lots of advanced option strategies.

gamingthemarket gamingthemarket

  • Frequent poster intraday.  Day-trades leverage ETFs

BuyOnTheDip BuyOnTheDip

  • Trades options and equities based on morning trend.

Joey downtowntrader

  • Ask him questions intraday, he will answer you.

ZMoose12 ZMoose12

  • Focus on ETFs.  Posts swing trades.

David Buffalo IRON100

  • Trades overbought, oversold and other imbalance indicators

Prospectus Prospectus

Andrew Coffey coffeygrinds

  • Trades from the floor of the S&P 500

MissTrade MissTrade

DistressedVolatility dvolatility

  • Post good articles on market current events.

zentrader zentrader

Lindzon’s Gang:

howardlindzon howardlindzon

Soren Macbeth sorenmacbeth

  • skilled and focus on currency trading

Philip Pearlman ppearlman

  • buys and sells options on the bigger ETFs

upsidetrader upsidetrader

  • Frequent poster.  Skilled day trader.

Finz.TV Posse…

Jeffrey Lin JeffreyLin

TraderAlamo TraderAlamo

Jamie Burak BHBGroupTrader

Vic Scherer daytrend

jsfalvo jsfalvo

Here’s the videos of the tornado we had last week.  Yeah, kindah strange having a tornado here.  Last time we had one was in 2005.  This one attacked a golf course. Ha!  It was heading for a school.  That would have been interesting. Category F-1… its weak sauce, but hey, where not supposed to have these here.

Off to the beach.

-gio-

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System.out.println (Using Bollinger Bands to Scalp FAZ)

Today’s tape is a good example on how to scalp trades on the short side.  Currently, as in “at this moment” I am using the bollinger to scalp some FAZ. Highlighted areas are where I enter FAZ.  I wouldn’t really recommend trading this way, but for those interested…

 

Here’s the pseudo-algorithm I’m using:

BollingerBand set (10)
Integer DJI = Dow Jones Industrial
Integer FAZ = leverage ETF

If (market in downtrend for weekly)   //test for market weakness

{

     If (DJI trending up intraday)

                then {

                       while (DJI within Bollinger Band) 

                                 {

                                Long FAZ

                                If (DJI close to bottom of Bollinger Band)  THEN sell FAZ

                                 }

 

     Else If (DJI trending down intraday)

               then  {

                        while (DJI BELOW Bollinger Band)

                        {

                               Long FAZ

                                If (DJI WITHIN Bollinger Band)  THEN sell FAZ

                        }

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