Converts close higher despite wild swing in stock markets

By Ronda Fears

Nashville, Tenn., July 15 - It was mind-blowing and no one thought it could happen. Wild swings in stocks, as the Dow plunged nearly 440 points only to recover all but 45 by the closing bell, buffeted convertibles harshly. But traders, seeing quite a bit of trading, described the market as closing mostly higher.

"Bottom-fishers swooped in and there was nothing short of a miraculous recovery," said another dealer.

"It was mind-blowing. I didn't think it could happen. I mean, we were on the way to a total disaster. Even when the buying started, no one thought the market could come back like it did, from where it did. Converts look like they even closed higher. Can you imagine?"

Amid the throes of corporate earnings season, comments from President Bush about the U.S. economy having a "hang over" from the excesses of the 1990s hit the tape.

Also exacerbating sentiment was a fresh round of headlines pointing to accounting scandals and Duke Energy being added to the list of power traders under investigation.

At one point the Dow Jones Industrial Average was 439 points in the red - but the measure ended down just 45.34 points.

"It was the craziest day, I mean wild," said a convertible dealer.

"We were trading quite a bit of converts but it was hard to get a handle on the market, what was really going on."

Meanwhile, the Nasdaq provided considerable lift to the convertible market, ending up 8.7 points.

"What can you say on a day like this. It's totally scary," said Yaw Debrah, head of U.S. convertible research at Merrill Lynch.

"People keep asking if we've seen a bottom. Merrill Lynch's strategist Richard Bernstein says as long as people keep asking if we've reach a bottom, then we haven't. When people give up and stop asking, then we've hit a bottom."

Some of the more active names in convertibles were in the energy and power group, biotechs and advertising agencies.

But dealers noted a lack of any real trend other than bargain hunting.

Outright fund managers are very quiet right now, many hesitating to make moves that would constitute a portfolio or weighting shift.

Arbitrage players are adjusting stock hedges and covering short positions.

"It's not as if you can sit down and make a rational decision," Debrah said, noting that any impropriety or hint of wrong-doing or questions will result in a swift and devastating blow to stocks.

"It's all about yield. This economy is not recovering as fast as people would like."

And, it's all about credit work, he added, even for the stock-pickers, since stocks have been decimated due to liquidity concerns.

It is a new reality for the stock-pickers, but crucial.

Mandatory convertibles still offer the best yields, Debrah said. Busted converts are abundant but some of the credits are more questionable.

Energy and power names were given a blow again Monday as Duke Energy was added to the list of those under investigation for wash trades.

Goldman Sachs and Morgan Stanley both downgraded the stock but some analysts think the market's reaction was overdone.

"Duke Energy is caught in the guilt by association trap," one dealer said.

"The volume of power trading revenues in question is miniscule, something like 1% or less."

Duke shares plunged by as much as $4.58, or 18.5%, at around midday but recouped to close down $1.05 to $23.70. The new 8% mandatory ended off 0.6 point to 17.84 and the older 8.25% mandatory closed off 0.8 point to 17.91.

CMS managed to get a new, amended bank agreement but the markets were not overly impressed. Fitch downgraded the company to BB- as a result of the negative impact on unsecured creditors of the newly restructured bank agreements.

CMS shares closed up 59c to $10.84 but the convertible preferred ended down 0.28 point to 15.53.

Biotechs experienced a good deal of the swings, as contraction in the industry weighed on investors' sentiment. There also was some speculation buying and selling based on the survivors, one trader said.

Millenium Pharmaceuticals, which has been an acquirer, saw practically no negative response to news that it was discontinuing trials for its chronic asthma drug.

The Millenium 5.5% due 2007 gained 0.125 point to 77.125 bid, 77.875 asked while the 5% due 2007 and 4.5% due 2006 were virtually unchanged. The 5s were quoted at 101.5 bid, 102 asked and the 4.5s at 101.625 bid, 102.125 asked. Millenium shares closed up 53c to $10.38.

But Amgen, also in acquisition mode, was hit rather hard. Traders said Amgen was dragged down as Immunex was to be removed from the Nasdaq 100 index after the close, just ahead of the merger with Amgen. There was arbitrage selling that resulted in the weakness as well, traders said.

Amgen shares ended down $3.83 to $31.07. The 0% due 2032 held up, though, ended off just 0.5 point to 65.5 bid, 65.625 asked.

Another surprise, trader said, was more buying in the battered telecom group.

Lucent Technologies shares gained 13c to $2.69. The 8% due 2031 was quoted up 2.125 points to 66.25 bid, 66.5 asked and the 7.75% due 2017 was quoted up 2.75 points to 69.5 bid, 69.625 asked.

Nextel Communications was gaining ground ahead of its earnings, which are set to be released before the opening bell Tuesday. There is a conference call scheduled for 8:30 a.m. ET.

Nextel's 4.75% due 2007 was quoted up 0.75 point to 55.75 bid, 56.75 asked. The 5.25% due 2010 was up 0.25 point to 49.375 bid, 50.875 asked. The 6% due 2011 gained 1.375points to 44.375 bid, 45.375 asked. Nextel shares closed up 60c to $5.

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