Market heartened by wholesale gains, but sellers outstrip buyers

By Ronda Fears

Nashville, Tenn., Oct. 1 - Players cheered the widespread mark-ups in convertibles as stocks posted whopping gains, but traders said trading volume actually slipped and selling outpaced buying.

Stock buying to cover short positions was the most common explanation for the huge 3.5% gain in the Nasdaq and 4.5% rise in the Dow Jones Industrial Average, as fundamentals are unchanged.

"Nothing's changed from yesterday, right, other than we are in a new month. After the huge drop [Monday], there had to be a lot of short covering going on," said a dealer.

"We didn't see a lot of flow today. Certainly, we didn't see a bunch of buyers flocking in. There were probably more sellers toward the end of the day."

Sellers of retailer and telecom equipment convertibles were noticed, as well as a few healthcare names, probably in the course of profit taking.

Among telecom equipment names, Agere Systems Inc. and Corning Inc. were lower on selling, dealers said, but there also still was some buzz about a big trade in Redback Networks Inc. on Friday.

Redback's 5% convertible due 2007 had been trading at about 36, then Friday there was a $100 million block of the bonds traded at 33, after which the bonds were marked down to 15 bid, according to a market source.

The convert was quoted Tuesday at 15 bid, 18 asked. Redback shares closed up 6c to 37c.

The trade Friday followed Redback's guidance on Thursday for revenue and a net loss that would fall below analysts' expectations.

"It doesn't make sense," the market source said of the Redback trade.

"I thought they were going bankrupt. Either someone unloaded their entire position, or maybe the company could have bought some of the issue back. That amount would be about half the total issue."

At June 30, Redback reported cash and cash equivalents of $90.9 million with the bulk of that sitting in investments.

Agere was getting punished for allowing its $500 million credit facility to lapse, traders said.

"The thinking is that they really can't be without a bank line," one dealer said.

The Agere 6.5% convertible due 2009 was quoted down 3 points to 51.375 bid, 52.375 asked. The stock closed off 11c to 99c.

The telecom equipment company said it paid down the remaining balance on its term loan due Sept. 30 but didn't renew the credit facility. Agere emphasized, however, that its current cash and cash equivalents balance of $900 million would be sufficient to meet cash requirements, including previously announced restructuring actions.

S&P agreed with that, saying that although Agere is still generating operating cash flow losses, with the cash and cash equivalents and no debt maturities until 2009, financial flexibility should be adequate to execute its plans to restore operating profitability in fiscal 2003.

Corning's 3.5% convertible due 2008 were quoted down 1.625 points to 54 bid, 55 asked. The stock ended unchanged at $1.60.

While the debate over Ford Motor Co.'s credit standing still hangs over the automaker, traders said there were plenty of buyers for the convertible.

UBS Warburg cut its price target for Ford stock to $7.00 from $9.50 and in a report said there seems to be no end to considerable operational problems facing the automaker with bond spreads having widened and Ford Credit now effectively shut out of the unsecured capital markets.

Ford reported sales for the nine months so far in 2002 are down 6.4% from a year ago and said it is extending 0% financing in an effort to boost sales.

But Ford's 6.5% convertible trust preferred due 2032 was getting bought in high volume, traders said. The issue gained 0.5 points to 40.8 as the stock rose 10c to $9.90.

General Motors Corp. also was finding buyers. GM reported nine-month sales rose 2.1% from a year ago, and also said it was extending 0% financing.

Traders said there were more buyers for the GM 4.5% due 2032 than the 5.25% due 2032 on perceived cheapness. The 4.5s added 0.3 point to 23.87 and the 5.25s gained 0.4 to 22.78.

Automotive manufacturers Navistar International Corp. and Cummins Inc., however, were not faring as well.

Moody's revised Cummins' outlook to negative from stable on risk that heavy-duty trucks purchases could falloff or be postponed due to uncertainty created by more stringent EPA emissions regulations, which would put more pressure on debt protection measures.

The Cummins 7% convertible trust preferreds dropped 0.39 point to 40.67 as the stock closed up 92c to $24.54.

Navistar warned of an expected loss and a recall of up to 90,000 trucks due to faulty brakes resulting in a charge of $51 million in the current quarter.

The Navistar 4.75% convertible due 2009 was quoted unchanged at 75.625 bid, 76.375 asked as the stock ended off 4c to $21.64.

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