Convertibles under pressure as May jobs report dims U.S. economic prospects; Navistar down

By Rebecca Melvin

New York, June 1 - Convertibles were under pressure Friday as equities slumped and investment-grade and high-yield spreads widened after a terrible U.S. nonfarm payrolls report for May dashed hopes for U.S.-led strength among the limping world economies.

In addition China's purchasing managers' index, or PMI, for May came in weaker than expected, falling steeply to 50.4, from 53.3 in April, and below market expectations for a reading of 51.5.

"The data looks worse than expected, and at this point, there are not a lot of outlets," a New York-based convertibles analyst said. "All the sectors look bad."

Liquidity was generally light, but there were some investment-grade names in trade at pricing that were in line with lower underlying shares. There was also selective bottom fishing among outright players.

Bankrupt Eastman Kodak Co. slumped another point or two to 11.5 to 12.5 from 13 to 14 and from the mid-teens a week ago.

Navistar International Corp. was weaker by about a point, extending the trend seen this week after negative comments from Jefferies and outright selling hit.

Airlines had been something of a bright spot given recent lower oil prices, but these too are coming under pressure given that the sector is not one to withstand higher unemployment and poor growth.

But coal stocks were up. There wasn't much action in the corresponding coal convertibles, but market players took note. A New York-based trader speculated that coal was moving against the current because the jobs report has implications for the upcoming U.S. presidential elections, and particularly negative implications for an incumbent win.

"The coal industry is going to react to anything that moves the election," the trader said.

The Obama administration's energy policy has been hostile to coal and policy initiatives have excluded it, but recently clean coal was added to the president's energy initiatives.

Elsewhere, Alliance Data Systems Corp. was a little higher by about 0.25 point on a dollar-neutral, or hedged, basis as the underlying share moved lower on Friday.

Alliance Data's 1.75% convertibles had carried 1.25 points of premium over parity a few weeks ago and on Friday had 2 points of premium, a trader said.

On Friday, markets were quieted by data that confirmed U.S. economic growth has slowed since the beginning of the year. U.S. employers created 69,000 jobs in May, which was significantly below expectations for a gain of 158,000 jobs, and the unemployment rate ticked up to 8.2% from 8.1%. There were also downward revisions on the number of jobs created in March and April.

Market players were not only stunned by the worse-than-expected jobs report, but they worried about the future of the euro zone.

"People are hoping that it doesn't fall apart," a New York-based analyst said.

Meanwhile a New York-based trader said, "The E.U. is going to break up soon enough, and that's not going to be handled too well by the markets; there's no mechanism for it to break up."

Stock markets responded Friday with their worst percentage drop since November 2011.

"I don't know if there's a lot of optimism out there. A lot of people are sitting and waiting with selective buying here and there by outright players," the analyst said.

The high-yield market was down 0.5 point, but the indexes actually started to come back a little bit during the session, the analyst said. "It's not a crazy move. There have been some people dipping in their toes."

Commodities, particularly energy commodities, have been hammered, in recent weeks, the analyst said. For example, crude oil fell 17% in the month of May. It stood at $84 per barrel during Friday's session, down from $105 per barrel at the beginning of May.

"Stuff is lower. Across the outright spectrum, a good chunk of returns have been given up for the year," the analyst said.

Navistar slips another point

Navistar's 3% convertibles due 2014 traded Friday at 96.875 bid, 97 offered outright, which was lower by another point from Thursday when the notes sold at 97.75 with the stock trading at $27.80.

On Friday, Navistar shares were down to $27.01, which was off 93 cents, or 3.3%.

The notes were said to be weakening on outright selling.

Shares were also weaker. On Wednesday, Jefferies predicted that the commercial and military vehicle producer may lower its annual profit forecast when it reports second-quarter earnings.

The Lisle, Ill.-based company may lower its annual profit forecast by $1 per share or more, a Jefferies analyst wrote in a note Wednesday.

Navistar is due to report earnings on Monday.

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