Ban on short selling takes wind out of convertibles; financials quiet, overall market slips dollar neutral

By Kenneth Lim

Boston, Sept. 19 - The convertible market was left twiddling its thumbs on Friday after a government ban on short selling of financial names took away a significant volume generator.

Those financial names that saw trading despite the temporary ban were better outright but poorer on a dollar-neutral basis as the overall market weakened.

Mylan Inc.'s recently priced 3.75% convertibles due 2015 were a point better at 106 against a stock price of $12.25. Mylan common stock (NYSE: MYL) closed at $11.80, up a touch by 0.34% or $0.04.

Mylan is a Canonsburg, Pa.-based maker of generic drugs.

Ford Motor Co.'s 4.25% convertible due 2036 was up about 2 points outright in line with the general market rally, changing hands at 72.25 versus a $5.25 stock price. Ford common stock (NYSE: F) gained 0.19% or a penny to close at $5.29.

Dearborn, Mich.-based Ford is an automaker.

Investors 'hamstrung'

Market sources said there was little to do on Friday with the short-selling ban, which will affect 799 financial stocks until Oct. 2, taking away a large chunk of the usual activity.

"We're kind of hamstrung here until they fix these rules," a desk analyst said. "We're doing some stuff away from financials, but that was kind of the bulk of what we've been doing."

"I heard that some guys went home early, because they figured there's nothing they can really do," the analyst added.

A veteran convertible trader also described a chill in the marketplace.

"Nothing seems to be trading," the trader said. "It just feels like with the shorts removed from the equation and a possible resolution to the credit issue with an injection into credit and money markets, there are just so many unknowns...I think things are slightly better for sale than bid for now. I think our problems are not over."

The trader said the ban took away an important part of the market.

"I think it's just a temporary move, because that type of move [if let for too long] can typically wipe out a product," the trader said. "It's an inherent part of capital markets. It's the shorts that sort out the weak companies. I think it's good, it's healthy, and it's market making."

Investors will be hoping for more clarity over the weekend, the trader said.

"I think when people have greater clarity on what the resolution trust is going to do, that'll help," the trader said. "When people have greater clarity on what the ability to short stocks will be, that will help. And that's stuff I expect will happen over the weekend. And once those things fall into place and people can asses the potential impact on banks and ultimately lending, that will work its way through to the markets."

The desk analyst hoped that the regulators will make exemptions for funds that need to short stocks as part of their normal trading.

"Maybe they'll exempt people who short stock in the normal course of business, like convertible traders," the analyst said. "I don't know if they'll be able to distinguish them, though...Anytime that this stuff is kind of constructed in a big hurry, you have problems like these."

Financials weaker

But some financial names saw a bit of trading, a sellside convertible analyst said. Those who traded were mostly investors who already had short positions before the ban came into place, the analyst said.

"The preferreds were down a few points dollar-neutral," the analyst said.

Wachovia Corp.'s 7.5% perpetual convertible preferred stock climbed about 10 points outright to 71 against a common stock price of $18.75. Wachovia common stock (NYSE: WB) closed at $18.75, up by 29.31% or $4.25.

Wachovia, a Charlotte, N.C.-based bank, saw its stock jump on Friday after the government unveiled a massive rescue plan aimed at restoring stability in the financial markets. Wachovia also got a boost from reports that it was in merger talks with Morgan Stanley.

Countrywide Financial Corp.'s Libor minus 350 basis points convertible due April 2037 held steady at 98.5 with a put approaching on Oct. 15, 2008. Countrywide is a Calabasas, Calif.-based home loan provider that was recently taken over by Bank of America Corp.

"The A's I think are putable in a couple of weeks," a sellsider said.

CapitalSource Inc., which was not on the short-selling ban list, saw its 1.625% convertible due 2034 gain about a point to trade at 94 versus a stock price of $13.50. Its 4% convertible due 2034 traded at 84, while its 7.25% convertible due 2037 was seen at 77, all against the same stock price.

CapitalSource is a Chevy Chase, Md.-based real estate investment trust.

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