Players focus on stocks as volatility spikes on snafu at CBOT; most new paper lower

By Ronda Fears

Nashville, July 3 - There was a red glare across screens on lots of convertible trading desks Thursday but it wasn't the rockets trilled of in the "Star Spangled Banner" that come to mind on the eve of Independence Day in America.

Stocks provided most of the fireworks for convertible players during the holiday-shortened session, and a good deal of the gyrations came from a snafu at the Chicago Board of Trade.

"Volatility spiked and got a lot of people excited, well at least most of the people that are even at work today," said a convert dealer.

The Market Volatility Index closed up 2.2% on Thursday, but has been on a lower trend for several months.

"It was really quite in convertibles per se, but we had stock orders from a lot of our convertible clients," the dealer continued.

"New issues were sort of active, but really nothing stood out today. There just wasn't a lot of people here."

The Chicago Board of Trade, the second largest futures exchange in the U.S., said it is investigating a huge trading error in its mini Dow Jones futures contract (YMU3) on Thursday that briefly sent the entire U.S. stock market reeling.

Reuters reported that trading sources said a large futures commission house entered an order to sell 10,000 contracts of mini Dow futures instead of an intended 100 contracts. With average daily volume of about 48,000 contracts in June, the YMU3 contract plummeted as a result of the supersized sell order.

Sell signals radiating out of the mini-Dow contract quickly dragged down the Dow Jones Industrial Average about 50 points and hit S&P 500 futures and cash indexes as well.

The S&P 500 closed off 8.05 points, or 0.81%, at 985.70. The Nasdaq lost 15.27 points, or 0.91%, ending at 1,663.46. The DJIA ended down by 72.63 points, or 0.79%, at 9,070.21.

Outside of attention given to stocks, convertible players were mostly still honed in on new issues in play.

New paper put into circulation this week were mostly lower, however, although a small gain was reported for the new General Motors Corp. convert and Crown Castle International Corp.'s new issue resumed its upward climb nicely.

Crown Castle's 4% due 2010 added another 3.5 points to 112.625 bid, 113.375 offered, with the stock closing up 48c, or 5.57%, to $9.10.

Investors wanting exposure to GM were looking to the new issue, versus its other two converts, but those wanting higher yield from the auto sector were looking to Ford Motor Co., said a buyside trader.

GM's new 6.25% convert ticked up 0.25 point to 24.86 bid, 24.91 offered. The existing converts were both flat with the 4.5s at 24.5 bid and hte 5.25s at 22.5 bid. GM stock closed off 16c, or 0.45%, to $35.78.

Ford's 6.5% convertible trust preferred edged up 0.15 point to 42.85 bid, 43.15 offered with the stock ending unchanged at $10.87.

Level 3 Communications Inc. was still the new issue on the lips of more traders, though.

The 2.875% convert, however, lost some ground Thursday on profit taking ahead of the three-day market hiatus, as one dealer noted many holders didn't want to be in a long position over a long, holiday weekend.

He also noted that Bear Stearns reiterated an underperform rating on Level 3 shares due to valuation, risk of further dilution, a high-risk business model and an overleveraged balance sheet.

Level 3's new 2.875%, up 19% convert gave back 0.375 point to 100.875 bid, 101.375 offered. The stock edged up 4c, or 0.68%, to $5.93.

Fisher Scientific International Corp.'s new 2.5%, up 36% convert also dropped 0.375 point, closing at 101.625 bid, 101.875 offered. The stock ended down 63c, or 1.71%, to $36.22.

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