Thin market ahead of long holiday weekend; weaker on Microsoft, IBM news

By Ronda Fears

Nashville, Jan. 17 - It was quiet again in convertibles Friday ahead of the long three-day weekend.

Most of the universe was marked lower, however, although to a lesser extent than stocks, which reacted to the IBM and Microsoft headlines.

"Who wants to go out long on a holiday weekend mid to latish January with a pretty sizable military buildup in Iraq where all we hear is that if there is an attack it comes late Jan. early Feb? Square the books," said Michael Revy, who manages a convertible hedge fund for Froley Revy.

"Things are picking up for sure," Revy added, referring to market sentiment.

"Perception is reality and I get the feeling that with Yahoo intimating and with MSFT paying a new dividend, Bush's new tax reform is gaining traction."

There could be more "capital friendly" legislation to follow, he said, like the suggested caps on malpractice.

Friday's snapshot of moods, however, was negative.

War concerns were a definite overhang, traders said.

Chips were still showing considerable weakness, primarily on news from IBM and Microsoft - which both plunged sharply - and traders said there were some sellers for Advanced Micro Devices Inc.'s new convert.

AMD posted disappointing results and the stock closed down $1.17 to $6.03.

"The [AMD] 4.5s lost 18-19 points and the old [4.75%] converts dropped something like 5 to 51/2," said a dealer.

The 4.5% due 2007 (CCC/B3) were quoted at a closing bid of 62 while the 4.75% due 2022 (B/B3) was quoted with a closing bid of 108.5.

Capital One Financial Corp. also saw a good deal of selling on its earnings, but a trader said buyers stepped in during the last hour of trading and stemmed the loss.

The Capital One 6.25% mandatory was down by more than 1.5 points during the session, the trader said. It closed off 1.18 to 31.43. The stock ended down $1.93 to $33.25, and also was trading much lower intraday.

Tyco International Ltd. was among the names succumbing to the weaker forecasts for corporate spending. The new 2.75% convert, or Tranche A, was quoted at 105.375 and Tranche B, or the 3.125% was at 107. Tyco shares closed off 33c to $717.87.

With 2003 rebound hopes fading, players are still hopeful about new issues although the number of new deals thus far has been slim.

"I think new issues could still be fairly strong, or at least flat with last year," said a New York hedge fund manager.

"There's still a lot of balance sheet work that could be done and certainly a lot of refinancing, given the level of redemptions and puts this year."

Not surprisingly, there were no new deals announced ahead of the long weekend, but players anticipate that something could surface late next week.

Thus, Oneok Inc.'s mandatory is all that is sitting firmly on the calendar. That $275 million deal is slated for Wednesday's business.

As a result, it is tough for fund managers right now.

"You gotta pick your spots. Just be careful. There are lots of moving parts. I see some surprises in retail and home building. Capital equipment got overbought, but I might be a scrappy buyer today," Revy said.

On the theme of looking abroad, he also said that has become a focus for opportunities.

"Across the pond, most definitely. Europe has generally better credits. The universe is a shade rich," Revy said.

"On a currency-adjusted basis had you sold dollars and bought SMI you would be up 2.68% CHF but up 3.96% in dollars. I also feel that the ECB may be more willing and able to lower rates if oil comes down a bit.

"Even the euro has added about 1% to your equity returns if your home currency is the USD. It makes the slim yields seem more attractive. I am worried that the dollar selling is ahead of itself here so I am just looking at ideas.

The only thing I have is the CS [Credit Suisse] mandatory. I do feel that the dollar premium will be reduced, maybe not completely, but reduced.

Revy said he is looking at ABB, maybe Holcim after its downgrade Friday, also mulling Infineon, and is starting to look at more names. He said he's not looking at anything in Asia except Samsung or Kepco.

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