Market gains amid profit taking, with buying in down-trodden names

By Ronda Fears

Nashville, Tenn., July 11 - Activity picked up markedly and convertibles were mostly higher as buyers stepped in to snatch up down-trodden tech issues, traders said. But many of the so-called old world names lost ground amid profit taking.

"Today was one of the busier days we've seen in a while," said a convertible trader at a hedge fund in New Jersey.

"A lot of people were feeling some pain over the last month or so. But it seems like people are doing better the last two or three days."

It was a bit shaky early on as it seemed another steep slide was in store for stocks, but sentiment shifted to a positive position in the afternoon. Despite mixed signals from tech names, the Nasdaq showed a solid move northward, helping converts the most.

The Dow Jones Industrial Average was down more than 200 points at one point, but closed off just 11.97, or 0.13%. The Nasdaq ended 28.42 points higher, or 2.11%.

"As far as a trend, it seemed the major themes today were to buy in the beaten-up sectors and sell the so-called leadership names, like Lennar, GM," said a convertible analyst at one of the major investment banks.

"There is some debate that this is a solid sign that we've hit a bottom, but I'm still skeptical. For one thing, there was a lot of short covering among the convert arbs. They were taking some big profits from the last rout."

While techs were hit the last few weeks, groups like healthcare, retail, defense and homebuilding were breaking out to new highs. The latter lost ground Thursday amid selling, the analyst said, and that money was churned into weak tech stocks.

"Some people are calling this capitulation, but I would reserve that call until after we get further into the earnings reports," the analyst said.

While convertible trading picked up Thursday, it still wasn't heavy and indeed many arbs were busy in stocks still. In any event, as one dealer said, most of the market was marked higher and that helped.

"It's hard to do convert arb trading right now," said a hedge fund trader.

"The credit spreads have widened out so much. Bond floors have been crushed. Deltas are so low, and so much of the market is out of the money."

The hedge fund trader, based in New Jersey, said he has been long Treasuries but now has moved into a short position and is keeping a considerable amount of cash.

"Some new issues would certainly help matters," the hedge fund trader said.

"I'm still hearing that there are some new deals in the wings if the market turns around."

Buzz has centered around the upcoming puts on the US Bancorp and Household International. Both are putable in early August, just a matter of weeks. Both are considered to be at high risk of getting put.

Sellside sources have been a bit cagey about those situations, but a Household spokesman shed some light on that particular situation Thursday.

"We will just allow people to put that [convertible] back to the company and refinance it in the normal course of business," said Household spokesman Craig Streem.

When asked if Household would refinance with another convertible, he said that would be up to the company's treasurer and indicated a decision has not been made.

USBancorp did not return phone calls.

Both issues are sitting at about the put prices with no activity.

The Household 0% due 2021 (A3/A), a $1 billion issue, is putable Aug. 2 at 82.736. The stock closed Thursday up 93c to $45.

The US Bancorp 0% due 2021 (A1/A), a $1 billion issue, is putable Aug. 6 at 75.282. The stock ended Thursday up 21c to $21.85.

The market also is anticipating something fairly soon from Orbital Sciences Corp.

In March, the space technology and satellite maker said it would be looking to replace or refinance its $100 million of 5% convertible subordinated notes due October 2002.

Mirant's new issue was beginning to rebound from some sharp blows right out of the gate. It priced July 1 and has been heading south practically ever since then.

On Thursday, the new 5.25% due 2007 were quote up 0.5 point to 89.5 bid at one shop but another put the bid as low as 87.375. Mirant shares ended up 74c to $5.03.

With stocks heading up after such a sharp decline, one trader said investors are wanting to get into position with some issues that are more equity sensitive or have opportunity for a nice turnaround in upside participation. Specifically, the trader said, buyers were out for key tech names, "those beaten up but not bloody," especially in the chip sector.

Agere Systems' 6.5% due 2009, which sold at par in mid-June, were higher at 96.5 bid, 97 asked as the stock gained 69c to $2.40.

Teradyne's 3.75% due 2006 was quoted up 3.75 points to 108.875 bid, 109.375 asked with the shares up $1.55 to $21.24.

Biotech and drugs names were mostly higher, but there were some exceptions.

Medimmune initially went south as a headline ran across the tape that the FDA was requesting additional information on its FluMist application. But as Medimmune said the FDA is requesting clarification and additional information relating to data previously submitted and no additional clinical trials, the story turned around.

The company also set a conference call for after the close Thursday, which a dealer said seemed to ease investors' minds.

The Medimmune 5.25% due 2008 was quoted up 1.875 points at 85.875 bid, 86.875 asked. The stock closed up $3.36 to $24.46.

But, ICN Pharmaceuticals got the opposite treatment as it warned about second quarter results.

ICN Pharma said it expects second quarter earnings per share of 15c to 20c, well below the analyst consensus for 44c. The company puts revenues at $236 million, versus the consensus $259.17 million, blaming lower sales.

The ICN Pharma 6.5% due 2008 (B+) was quoted at 59.5 bid as the stock fell $10.65 to $9.30.

General Motors and Ford both continued on a southward path.

Ford's 6.5% convertible trust preferred due 2032 (Baa2/BBB-) lost another 1.25 points to 50.375 bid, 50.625 asked. Ford shares closed off 81c to $13.18.

Lennar also continued to be a target of sellers. The 0% due 2021 (Baa3/BB-) lost 1.375 points to 46 bid, 46.375 asked as the stock lost $3.07 to $56.82.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.