Flow still lagging on Fed day; energy names fall on Enron news

By Ronda Fears

Nashville, Tenn., May 7 - Convertibles ended on a flat note along with mixed stocks, and general flow was described as slow as the Federal Reserve meeting sidelined most players although the decision to leave interest rates unchanged was no surprise.

"It was very choppy, so a lot of people were just sitting back to see how everything shakes out," said a dealer.

With a light new issues lineup, events and strategy shifts were driving activity - in both directions.

Energy names fell hard on the information released by federal authorities allegedly showing that Enron Corp. manipulated prices in contribution to the California electricity crisis. Suspicion of the practice spread throughout the sector, taking several victims such as Calpine, Duke Energy, Williams, El Paso and Mirant.

Brocade Communications Systems Inc. fell on news that Motorola Inc. had chosen Texas Instruments for a big contract, while Network Associates rose sharply to make up some lost ground on word that the company expects to close its accounting investigation this week.

"In general it was a slow day," said Jeffrey Siedel, head of U.S. convertible research at Credit Suisse First Boston.

"Volatility has started to creep back up, but I don't see a lot of catalysts to move this market. The calendar hasn't helped much, either."

As a result of a light slate of new paper, news drove much of the activity or lack thereof.

Although the Fed left rates alone as expected, the meeting itself sidelined a lot of players and the indication that the Fed believes risks are balanced between weakness and inflation provided no momentum following the news.

There was some heavy selling in energy names as Enron resurfaced in the headlines, traders said.

Memos released by federal energy regulators released Monday documented how bankrupt Enron used trading practices as a manipulative tool to drive prices up during the California energy crisis, and that caused suspicion that several Enron peers did the same. Enron employees were even quoted as telling regulators that such practices were or are commonplace.

Williams, Mirant and Duke Energy issued responses, stressing that their practices were within the law.

But selling prevailed and the group took a dive, with Calpine and El Paso leading the decline.

Calpine's 4% due 2006 fell 4.125 points to 84.5 bid, 84.75 offered with the stock down $1.05 to $8.70.

El Paso's 4.75% preferred due 2028 dropped 5.75 points to 40.75 bid, 41.75 offered and the 0% due 2021 lost 0.5 point to 40.5 bid, 40.75 offered as the underlying shares fell $2.26 to $32.90.

Also heading south were several tech names.

Brocade tumbled after Motorola Inc. selected Texas Instruments to provide additional chips for its next-generation cable modem. The Brocade 2% due 2007 dropped 3 points to 81 bid, 81.5 offered with the stock down $1.99 to $19.90.

However, one dealer noted that several key players in the market are beginning to take long positions in the tech sector on a selective basis, betting that there will be an uptick in business - particularly semiconductors related to wireless phones.

Some moves into Network Associates were paying off, as the security software firm soared on word that the company planned to resolve its accounting issues with the SEC this week.

Network Associates CEO George Samenuk said the company expects on Wednesday to complete its internal investigation of accounting irregularities uncovered in 1999 and 2000 financial statements.

After the news hit the tape, Network Associates shares climbed $2.71 to $19 and that sent the 5.25% converts due 2006 up 13.625 points to 130.5 bid, 130.75 offered.

"I was short and then I got long because our analyst said there wasn't going to be any more skeletons in the closet here," said a hedge fund trader in New York.

"This afternoon it looks like that bet paid off."

Some people are beginning to get nervous about long positions in homebuilding paper but one portfolio manager said he is going to hold out a while longer before selling out.

"I admit I am getting nervous about being long in homebuilders but I was talking to one of these guys yesterday and he says they see no end in sight to the money coming in," said the convertible arbitrage fund manager, who is based in New York.

"It doesn't make sense, with all the talk of a recession. But they are building and have more plans to build. Money is cheap right now. At some point in the not-too-distant future, I will be exiting this group, though. It makes me too nervous."

D.R. Horton and Lennar are the choices in the homebuilding group for convertible investors, both with 0% convertibles in play.

On Tuesday, the D.R. Horton 2021 issue slipped 0.125 point to 72.25 bid, 72.75 offered with the stock off 8c to $26.20. Lennar's 2021 issued edged up 0.5 point to 44.5 bid, 44.75 offered and the 2018 issue gained 0.625 point to 73.875 bid, 74.25 offered as Lennar shares added 63c to $56.13.

"Now's the time to be making some bets," Siedel said, and most of the market is looking for an angle to play.

Another hedge fund manager said special situations have turned his head. Right now he is looking at Hanover Compressor, which has been battered also by an accounting investigation.

"I am very interested in Hanover Compressor. I'd be a buyer," said the fund manager.

"We just have to do some homework on the name."

Hanover Compressor shares closed Tuesday down 43c to $16.89. The 4.75% converts due 2008 slipped 0.5 point to 80 bid, 80.625 offered.

While awaiting new deals later this week, the new mandatory issues in circulation were rather flat with light volume.

CenturyTel Inc.'s 6.875% mandatory slipped 0.15 point to 24.8 as the underlying stock edged up 3c to $28.50. Alltel Corp's 7.75% mandatory added 0.10 point to 49 with the stock up 20c to $48. KeySpan Corp.'s 8.75% mandatory gained 0.12 points to 50.3 while the stock rose 35c to $35.75.

But the new Lennox International Inc. note was solidly higher on buying as investors favored the more traditional structure with a high coupon, traders said. The 6.25% convert due 2009 added 1.875 points to 108.25 bid, 108.5 offered as the underlying stock rose 37c to $15.62.

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