Lowe's gains on Isabel threat; tech valuation concerns bring sellers out for Symantec, ADP

By Ronda Fears

Nashville, Sept. 15 - With hurricane Isabel threatening to ravage the Mid-Atlantic coast, insurance names like Chubb Corp. were hit but home improvement retailer Lowe's Cos. Inc. skyrocketed on the anticipation of a surge in sales.

"Reports say Isabel has weakened but it could still be the worst hurricane to hit the East Coast since Andrew [1992] but there also was news on the tape that lumber sales were already going up, so there was a surge in Home Depot, Lowe's, those guys," said a convertible dealer.

Lowe's shares climbed $1.25, or 2.43%, to $52.70. The 0% convertible due 2021 gained 2 points to 87.875 bid, 88 offered and the 0.861% due 2021 added 1.5 points to 104.25 bid, 104.75 offered.

According to the National Hurricane Center in Miami, hurricane Isabel weakened Monday afternoon but remained a major threat to the Mid-Atlantic coast. It is just below a Category 5 in strength and was moving west-northwest toward Cape Hatteras, N.C.

Standard & Poor's reiterated an overweight recommendation on stocks in the property/casualty subgroup, and a top recommendation on Chubb Corp. along with some others in the sector, but traders said there still was a big sell-off because of weaker credits in the group.

"We remain positive longer term on the property-casualty industry due to the premium pricing power that we think still exists," said Catherine Seifert, S&P insurance stock analyst, in a report.

"We share the market's near-term concern that Hurricane Isabel could rival Andrew's more than $25 billion in insured losses. Allstate has the greatest exposure to this storm, but Safeco and Chubb are also exposed.

"Historically, insurance stocks have traded up in the aftermath of a disaster," Seifert said, but added: "The industry's capital position is more leveraged going into this storm."

Chubb's 7% convertible due 2005 dropped 0.34, or 1.25%, to 26.9 and its 7% due 2006 lost 0.44, or 1.6%, to 27 on the New York Stock Exchange. The stock fell 60c, or 0.93%, to $64.25.

In general, at least one convertible dealer - the chief convert trader at one of the big shops - said there is some anxiety ahead of the FOMC meeting Tuesday. Not that there is a widespread opinion that the Federal Reserve will be raising interest rates, he said, but that high-yield credit spreads will widen anyway.

"There just seems to be a general feeling brewing that spreads are too tight, particularly in high yield," the trader said.

A buyside source echoed sentiment that spreads seemed too tight, but market watchers are at a loss to specifically identify the catalyst for any widening. Rather, some see cause to expect more tightening.

Tightening credit spreads mirror declining credit risk, said Banc of America chief credit strategist Jeffrey Rosenberg, so he expects further spread compression, particularly in relation to high grade paper.

Amid "stronger economic performance ... coupled with the decreasing uncertainty of default rates looking forward, high yield value continues to look attractive on a relative basis" to the high grade universe, he said.

If interest rates were to spike up and the yield curve flatten rapidly, though, it would bode ill for swap spreads and bank and high quality credit spreads with the most interest rate sensitivity.

Convertible dealers also said some hedged players joined the broadbased concern about tech stock valuations and were selling paper in that group, namely Symantec Corp. and Automatic Data Corp.

Symantec's 3% due 2006 was quoted down 4 points to 174 bid, 175 offered. The stock dropped 22c, or 0.37%, to $59.26.

ADP's 0% due 2012 lost 2 points ot 98.875 bid, 99.875 offered. The stock closed fell 80c, or 2.07%, to $37.85.

Ongoing negotiations between the United Auto Workers and Ford Motor Co. and General Motors Corp. while a tentative contract was struck with DaimlerChrysler AG caused mixed reactions.

Traders said Ford's weaker performance and heightened concern over the credit sparked selling in the converts, while there were buyers for GM paper even while the stock flagged.

Ford's 6.5% convertible trust preferred lost 0.5 to 45 with the stock closing down 23c, or 1.985%, to $11.37.

GM's convertibles were all slightly higher with the 6.25s at 27, the 5.25s at 22.75 and the 4.5s at 24.5. GM shares ended off 28c, or 0.67%, to $41.25.

Meanwhile, the primary market still flagged and capital markets sources pointed to the fourth quarter for any significant pick up in activity.

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