Freeport-McMoRan buried by gold sell-off; Yahoo kicked up 2.25 points, also lifts Amazon

By Ronda Fears

Nashville, Oct. 3 - It was a bit quieter Friday, being the close of the week, but traders said the real damper on the convertible market came from the beating bonds were taking in the wake of strong jobs data.

The U.S. Labor Department reported additional jobs in September, after seven months of losses.

"Things were a little bit slow today with the bond market taking it on the chin," one market source said, adding that the rising interest rate climate could cause some convertible players to begin worrying about risk in that area.

Gold futures also caved in, dropping nearly $17 an ounce during the session, with the December contract ending down $13.70 to $370. That sent Freeport-McMoRan Copper & Gold Inc. spiraling.

"Gold futures fell really sharp on several big sells and that triggered several more, and that sent the gold stocks like Freeport into a tailspin," said a convert dealer.

"FCX [converts] was active but I wouldn't say there was some massive exodus. There were sellers, but there were also buyers because people are still bullish on gold. It's a pretty active name anyway, but the bonds [new converts] traded down pretty sharply."

Freeport-McMoRan's new 7% convertible due 2011 lost about 5 points to 138.5 bid, 139 offered as the underlying stock fell $1.97, or 5.5%, on the day to $33.77. The older 8.25% converts due 2006 plunged 13.5 points to 240.75 bid, 241.25.

At the other end of the pendulum, optimistic views that Yahoo! Inc. would be posting better earnings next week was giving a lift to most of the Internet group. Some of that optimism spilled over into general advertising names in the media sector, as well, but with a much more guarded view apparent.

Yahoo's 0% convertible due 2008 gained 2.25 points to 118.25 bid, 118.75 offered with the stock up $1.33, or 3.5%, to hit a new 52-week high of $39.24. Yahoo will pretty much kick off the earnings download into the market, reporting results next Wednesday.

Amazon.com Inc. shares popped up, too, gaining $2.80, or 5.59%, to also strike a new 52-week high of $52.89. The Amazon 4.75% convertible due 2009 added 1.75 points to 99.25 bid, 100.25 offered. Amazon reports results Oct. 21.

Chinese internet stocks also were higher, but traders said the tiny converts linked to those names are hard to find. Traders said there were fresh markets on the Sina.com, Soho.com and Netease zero-coupon issues, but also noted more activity in the stocks as short-sellers appeared to be covering positions ahead of earnings from that group.

InterActiveCorp was one of the better performers from the convertible side of the story, traders said, as the two Deutsche Bank floaters linked to that stock are popular in the current interest rate environment. Tranche A was quoted up 4.875 points to 168.375 bid and tranche B up 4 points to 150.625 bid as InterActiveCorp shares rose $1.36, or 4%, to $35.36.

An expected gain in online advertising is the source of a lot of the optimism in the internet sector, and some of the somewhat positive signs in business also are expected to translate into better numbers for traditional ad agencies.

Getty Images Inc. was seeing a positive reaction to speculation of increased online advertising, particularly at Yahoo, as it produces a lot of the pictures in those ads. Getty's 0.5% convertible due 2023 gained 0.625 points to 90.5 bid, 91.5 offered. The stock rose 52c, or 1.42%, to $37.05.

But there is still some concern with the traditional ad names like Interpublic Group of Cos. and Lamar Advertising Co. - both of which also recently filed debt shelf registrations, Interpublic doing so late in the week.

IPG filed a big $1.8 billion shelf and Lamar one for $288 million in mid-September.

"There is a little concern [about the IPG shelf], but it doesn't look like anything more is imminent," one trader said.

"They [IPG] need to refinance over the next two to three years and they are getting ready for that."

Both of those ad names have new converts in play, anyway.

IPG's 4.5% due 2023 was quoted at 141.375 bid, 141.625 offered, up 0.25 point. The stock closed up 4c to $14.04.

Lamar's 2.875% due 2010 was quoted at 95.125 bid, 95.625 offered. The stock closed up 44c, or 1.43%, to $31.28.

There wasn't any new paper put into play for the week, however. But there were lots of people talking about new money in the convertible asset class, due to its relatively good performance and the expectation that issuance will be decent at least for fourth quarter.

"We're hearing there's a lot of new money floating into in the market, but mostly from hedge funds, not the outrights really," said Anu Sahai, a co-manager of the ING Convertible Fund.

"Together with no new issues, that's what's lifting the market. To me it's been overvalued, but I've been saying that for some time now.

"Our performance, relative performance, is suffering a bit, so we're not resting on our laurels. I think it's going to turn out to be a pretty good year, but I'm not really going to make a call yet. We'll wait to see how the [fourth] quarter pans out."

Economic signs appear to be more optimistic, and many believe that will be bullish for stocks and in turn be a positive force for credits.

Moody's economists John Lonski and Kamalesh Rao said in their daily report Friday that "once employment turns higher decisively," the 10-year Treasury yield will quickly approach 4.75%, stocks will extend recent gains and the dollar will appreciate. They also expect speculative-grade yield spreads will narrow another 50 basis points, while high-grade bond yield spreads will narrow another 10 to 20 bps.

Banc of America Securities global markets analyst David Goldman echoed that sentiment.

"Today's improved payroll report was the latest in a series of data points that have reaffirmed our confidence in our constructive outlook for the credit markets," Goldman said in his daily report.

"With the S&P 500 expected to show a 15% yoy increase in earnings for 3Q and corporate confidence on the mend (which should lead to more jobs), we believe there are still reasons to be optimistic on credit."

Optimism in telecom spending has been a source of several gains this week, convert traders said, with Juniper Networks Inc. making a nice pop on Friday.

Juniper shares rose sharply on a Lehman equity report expecting solid quarterly results when the company reports on Oct. 9, specifically citing the appearance that telecom carriers are spending more lately on the kind of network equipment made by the company.

Juniper's new 0% due 2008 shot up 5.5 points to 107 bid, 107.5 offered while the stock rose $1.39, or 9.12%, to $16.63.

A couple of high-yield traders that move convertible paper also noted some buying in Manugistics Group Inc. and i2 Technologies Inc.

A week ago, Manugistics posted a narrower second quarter loss, saying lower operating costs offset a revenue drop, and said it sees a breakeven third quarter on adjusted net income and further improvement in fourth quarter.

"I'm starting to warm up to the name [Manugistics]. The converts are trading around 83/84 for just under 10% yield, which seems good, but is it worth it for only 150 basis points of yield for something that is going to have trouble when it comes to refinancing?" one market source said.

"The seem to be getting cost under control, they've managed to keep a tight lid on capex. But in the recent quarter where they showed neutral free cash flow their vendors extended them credit and if or when spending comes back they will have to use cash to keep up."

Following the Manugistics numbers, several analysts upgraded the equity and the converts took off alongside the stock. The 5% convertible due 2007 was unchanged at 83 bid, 84 offered as the stock closed up 25c, or 4.5%, to $5.80. But the converts have risen more than 50 points over the course of this year, one trader pointed out.

i2 Technologies, which was delisted from the Nasdaq for a couple of week amid delayed and restated financials, also gained on some buying Friday. A trader said the 5.25% due 2006 rose 0.5 point to 80.5 bid, while the stock closed in over-the-counter trading up 11c, or 9.5%, to $1.41.

"There's way too much uncertainty to get behind this name [i2]. My biggest concern is that [in second quarter] they wrote off deferred revenues by another couple hundred million," a market source said.

"The bonds have traded up since June but that's because the market overall is bid up. People are reaching for yield, but some of these bonds are 60 cents on the dollar for a reason."

Just since Aug. 15, one trader noted that the i2 converts are up nearly 15 points.

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