Life Partners (LPHI) Gets the Death Sentence

Bam!  Down -20%.  Someone wants the death stock dead.  LPHI, which makes money on death, is getting machine-gunned itself.  Yeah, we can thank Cramer for today’s meltdown.  He totally killed this stock on Thursday (http://www.cnbc.com/id/15840232?video=1031894432) and basically all he did was repeat Citron Research’s memo and try to explain LPHI’s chart with IBD terms.

LPHI just cleared a multi-month support of 25.13, volume picking up a bit.  I would not enter a short here because this -20% decline is a media effect.  Rather, try on a relief rally slightly above that new resistance test of 25.13.  I realize that last sentence horrible grammer it has yes it. Lol. 

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What in the world was that close?

Wow, sorry for these late posts.  I’ve been getting a lot of questions about the VIX lately and with my schedule right now I haven’t been able to answer most people’s question. 

Here’s today’s close, with the market squeezing after the VIX reversed at 46.80.  Notice the breakdown in the VIX right at 44.54, I actually had that as my “rally point” in the market, but the market was already rallying at that 46.80 reversal.  That was all hindsight, but I’ll take you through my thought process intraday…

One nice lesson we had with the VIX today was that despite the market being down -2%  (about -200 points) I felt the sell-off was weak.  I even warned intraday NOT to short FAS or go long FAZ (I was looking like a fool when the Dow dropped another 40 points, but I still didn’t believe it). 

 

Why did I feel not to chase bears?  Simply because the  market down that much today while the VIX was barely even green!  That’s nonsense.  A market sell-off needs volume + panic, otherwise it is what I called or describe as a “trader-controlled” tape.  In other words, KEEP THURSDAY’S TAPE in your archive and recognize these unusual and backwards patterns because they are rare and could hurt you if you get caught trading them.  For example, compare today’s tape against Tuesday’s selloff.  You will notice Tuesday had a “proper correlation” with the VIX spiking up while the market tanked.  Today we had the VIX gapped up, but trickled down as the market went down… total imbalance!  This was a “weak sell-off”.  Even the leverage ETFs fell for that trap as I saw with irritation FAS down -14% at one point.   I don’t know how else to explain it, but try to imagine the entire market as one individual stock and then you’ll probably see where I’m coming from.

 

 … I was pretty close.  I called the sell-off weak when the Dow was down about -180 points.   43.94 was within the VIX spike down.  However, the true rally point was a reversal at 46.80 (see chart above).  At least I was looking in the right direction.

The cool thing about this was that I went through the day knowing that the selloff was fake.  I mean, just knowing and understanding that gave me a huge edge.  I’ll admit, I didn’t ride FAS in that end of the day rally, but I also didn’t try to short it or buy FAZ earlier in the day for a daytrade.  I think many technical traders would have bought FAZ on that “breakdown.”   However, at the end of the day, we squeezed and that caught people off guard.  I was NOT off guard because I trusted the anti-pattern in the VIX was telling me something was not right.  So I made no trades on the short side.

I think Chart Addict refers it to a WTF pattern.  Well, that WTF pattern was basically the market “re-balancing” itself.

And as always, even if I didn’t make money off a call, I’m happy if someone else can.  

 

 

Hey, that’s great!  Eventually I hope you all can figure out this VIX business, or at least create your own feeling and sense of it.  I mean, I would rather show someone how to use a hammer than go out and hammer every nail for them.  And let’s face it, do you really want to hold the nail as I’m hammering away?  Lol.  I’ve hit my fingers a few times. 

 I know there’s a lot of new traders out there, so I’ll remind you once again, as great as the VIX is, there are some tapes that it just won’t work.  So, be flexible and dynamic in your trading strategy, adjust when needed and learn how to use different indicators for different scenarios/environments; oh yeah, and keep it simple.   Now that’s easier said than done. 

A hui ho,
-Gio-

(“until we meet again”)

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Well, that’s a well known word around here.   Anyway today I got a paper-cut in my LPHI longs, no thanks to a Citron report.  Those guys… you don’t want them uttering anything about any company you’re invested in.  Grrr.  Anyway, I sold out early in the day Wednesday, but am intending to re-buy this stock in the near future.  At that time LPHI was down about -5% and I was at 1/3 position.

If you’re not familiar with Life Partners (LPHI), well, they basically make money off of death.  Hmmm… let’s see, first they set you up with someone to buy your life insurance then pay you some of the benefit while you’re alive (because what use is all the money once you’re dead), however when you die, they get your death benefit.  What a money making concept!  I remember my accounting professor talking about this once in class… its a clever way to make money, but you need to have money to begin with.  So yeah, it makes the rich richer kind of thing.  Evil.

Well, I do have some experience selling life insurance.  I think it’s a good product for families, but the sector got so nasty internally I got out in a few months.  I think people didn’t fully understand the mechanics of cash-surrender value blah blah, and were trying to take out money that was getting heavily penalized/taxed… almost in the same way people are dipping into their IRAs for “emergency funds” (dumb idea.  Get a loan.).  Whoa, I kind of got off topic…

… okay, back to LPHI.  Here’s the blah blah from Forbes 2/10/09:

Sucking the Life Out Of Life Partners
Ruthie Ackerman, 02.11.09, 10:40 PM ET

 

 

Life Partners Holdings has made a business out of profiting from death. But whether those profits are sustainable was the question of the day Wednesday.

The Waco, Texas-based life insurance settlement provider matches people who no longer need or can’t afford their life-insurance policies with investors, who pay a fee–plus the premiums–to buy the insurance and receive the benefit upon the person’s death.

But Citron Research sees red flags where investors see green. Citron warns that the $500,000 fees Life Partners charges are “egregious” and may not be “sustainable.” Citron claims that Life Partners’ gross commissions were 14.4% of the face value of settlements in its third quarter, which ended on Nov. 30. Yet, the average fee is around 6.0% of the face value. “If Life Partners is forced to cut margins even by half to approach industry norms, its net profit will sink by 63%,” Citron said.

Following Citron’s report, Life Partners shares plunged 13.7%, or $4.41, to $27.85, at the close on Wednesday.

Citron questioned the integrity of Life Partners Chief Executive Brian Pardo, who it says was “previously sanctioned by the Securities and Exchange Commission for materially misrepresenting financial results,” when he was CEO at Solar King. Citron said the SEC charged the defendants violated the antifraud and reporting provisions of the securities laws and that Pardo made false statements to the company’s auditors, materially overstating the company’s revenues and profits.   (wow! what an awesome attack!  Good job Citron)

Pardo fired back after the closing bell, saying Citron’s report “contained inaccurate assumptions, misinformation and erroneous facts about our company.”

Pardo said he is confident that Life Partners’ business growth will remain strong. “We vehemently disagree with the conclusions reached by the author of the report and believe strongly that our business model will continue to demonstrate the sustainable growth we have exhibited over the last 18 years.”

Since 1991, Life Partners has completed over 84,000 transactions totaling over $1.7 billion in face value.

… so, as you can see, Citron was egregious in using the word egregious.  Does that make sense?  Anyway, LPHI is a “leader stock”, so I’m actually considering buying this dip just because they have a business model that might work really well in times of crisis.  If not, I see LPHI as a long term short (with an entry point later in the year), because I do feel their CEO Brian is a big red flag and will come up again in the future.  Keep this on the same list we had ARTC on.   

… if you look at the 1-year chart, you can see that Citron’s revealing of this report was very well timed.  I’ll leave you to figure that out…

 

 

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This is for my archive because today’s tape is a good case study on fading the news. I counted about 6 bearish flags intraday on the DJI/SPX/NDX. Using that flag pattern I straight up hit the reversal point on the VIX that led up to a big selloff in FAS.  Hit this one to the stinking penny. PENNY!!  😉

… FAS went from 9.20 to 7.92 in about 2 hours. We had 16% to play with there. I capped out at 5%. As you already know, I went into today with a strong bias to fade FAS.

ALoHa!
-gio-

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Not really Hawaiian, but this band is famous here.  Check them out at Pipeline Cafe.

Right now I’m bloggin in front of the TV, watching yet another lame show on MTv.  It’s just a bunch of junk, seems like they only do shows about P-Diddy.  I think I’ll go back and watch A-Rod confess his use of steroids.  At least that’s a little more pure.  New York?  What happened to you?  First the Knicks… now this?  Anyway, how many more bands does Diddy have to fail before he quits?  I swear, they are on something like Making the Band Part 14 already.

…what’s that? They just showed a commercial of Wrigley’s Double Mint Gum with Chris Brown.  I thought they stopped that campaign?  Whatever.  If I find out he really did beat on my x-girlfriend Rihanna, he better watch his back… I’m gonna take a surfboard to his head.

Okay, enough of the crazy world of celebrity… oh wait, no, not enough!  One more thing.  I was watching Nickelodeon w/ my nephew (I swear, w/ my nephew), and there was some crazy whack stuff I saw on there… little 12 year-olds kissing.  And I mean lip locking.  What the?!  What has this world come to?  The only legit thing to watch on TV is basketball… oh, not unless you saw that rainbow fade-away Kobe did on Lebron- that was straight up criminal.

Oh yeah, fade FAS.

-gio-

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Sometimes it’s good to sit back and ask yourself, “Why am I trading”?

You know, the answer to this question could be what’s holding you back from reaching your potential. The way I see things is that every trading strategy is like a different path to your goal.

Can you handle the path?

Do you really want to get to that destination?

Maybe all you need to do is change one aspect of your trading strategy or approach and that will get you back on the right track.

Think about it.

-gio-

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