Convertibles slightly higher but thin post-holiday volume persist

By Ronda Fears

Nashville, Tenn., Jan. 2 - Convertible traders said it was a light post-holiday session Wednesday as many market players took the remainder of the week off. Without a lot of news to drive any notable activity, most of the positioning among convertible players took place in the stock markets. Convertible issuers were generally marked higher as stocks advanced, traders said, but there were some sharp declines in the defense sector

The primary market remained idle, with not even a rumbling yet of any new deals although the market generally expects the New Year to begin strong. While some onlookers don't expect any new deals to emerge until the first full week of the year, next week, others thought there may be a new deal announced if not launched before the end of this week.

"Trading is still a bit thin out there," said John Siebel, a convertible trader at Silverado Capital Management. "To be honest, the jury is still out on what's going to happen this year. I expect that by the middle to end of next week we'll be back in full swing."

Market players, at least the hedge funds, were mostly busy in the stock market as equities climbed. The Nasdaq added 28.85, or 1.48%, to 1979.25 and the Dow Jones Industrial Average gained 51.40, or 0.52%, to 10073.40.

"There was not much going on, some massaging of positions, getting caught up on year-end stuff that hadn't been finished," said a convertible trader at one of the major investment banks in New York. "Some came in just in case something happened, and were able to get a few trades off, but for the most part several of us could've stayed home."

Even what little news that was moving issues was mostly old news, traders said.

Defense issues, like those of Northrop Grumman, L-3 Communications, Alliant TechSystems, Lockheed Martin and Raytheon were hit on old news from Monday that a Northrop Grumman unmanned drone crashed while on duty in Afghanistan, although the aircraft was not hit by enemy fire. Northrop Grumman's new 7.25% mandatory convertible due 2004 was marked down 2 points to 109.5 bid, 110 offered as the stock fell $2.30 to $98.51. "This was a knee-jerk reaction. We didn't see any of the converts trade on it," said one trader.

On another report from Monday, ImClone Systems Inc. fell sharply again after losing considerable ground New Year's Eve after the Food and Drug Administration refused to accept the company's application for its new cancer drug, Erbitux. The company said the application was refused because it lacked documentation. The company said it has additional data and hopes to refile the application in first quarter. But the ImClone 5.5% convert due 2005 dropped 4.875 points to 101 bid, 101.5 offered with the stock down $3.13 to $43.33.

Fleming Cos. was also dropping still, traders said, but there was no immediate explanation. "The name is in some sort of steady drop that has been pretty much unexplained," said one trader. The Fleming 5.25% convert due 2009 (B2/B+) lost 4.5 points to 80.5 bid, 81.5 offered as the stock dropped $1.71 to $16.79.

However some traders on junk bond desks said Fleming - which has a major long-term contract to supply grocery items to Kmart - was lower after Prudential Securities equity analyst Wayne Hood cut his rating on Kmart stock to "sell" from "hold" and raised the specter of a possible bankruptcy filing by the discount retailer. High yield players said Fleming bonds dropped in response to Hood's prediction that Kmart's money woes may force it to cut spending, which in turn could put a damper on the company's plans to add grocery aisles - to be stocked by Fleming - to many of its 2,100 store locations.

There were more gains, however, as stocks rose.

Chips and several telecom issues were among the best gainers, traders said.

LAM Research Corp. (B) saw its converts add 1.5 points with the 4s due 2006 at 91 bid, 91.5 offered and the 5s due 2002 at 111 bid, 111.5 offered as the underlying stock gained 97c to $24.19.

EchoStar Communications Corp. was applauded Wednesday after it issued a statement today concerning efforts by EchoStar's DISH Network to discontinue carrying the Disney-owned ABC Family Channel and ESPN Classic channels. The company said the dispute "is simply about EchoStar trying to protect its customers from Disney, a giant media conglomerate that has imposed rate increases well beyond the rate of inflation." EchoStar's converts added 2 points with the 4.875s due 2007 at 91.5 bid, 92 offered and the 5.75s due 2008 at 92.5 bid, 93 offered as the stock gained $1.28 to $28.75.

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