Market lags late-day lift in stocks

By Ronda Fears

Nashville, Tenn., June 5 - Despite a late-day bounce in stocks, convertibles were described as weaker on whole. The tech area was particularly soft on a warning from Manugistics, while retailers and homebuilders surged. El Paso firmed somewhat on a couple of overnight straight bond issues by the energy company and one of its units.

Meanwhile, the market continued to try to get a grasp on the valuation of Nortel's new deal.

"Convertibles lagged stocks, even with the late surge in techs on the Oracle news," said the head convertible trader at one of the major investment banks.

"It's very frustrating. It seems every time the market seems to get its legs under it and heading north solidly, something else happens, some damned integrity question, and everything goes to pot again. Now, we're in the mode of trying to build back from the overselling that's been going on."

Outside of positioning for the four new deals pricing this week, market players also were watching for possible developments, such as sweeteners, in regard to upcoming puts, namely Markel, Novellus and Household.

El Paso surprised the market with a $500 million 10-year note sale late Tuesday at 290 basis points over Treasuries, and its El Paso Natural Gas unit with a $300 million 30-year bond sale at 275 basis points over.

"The fact that they could access the capital markets right now, with all that's been going on with regard to the wash trades and the treasurer's suicide, you name it, it's pretty remarkable," said a convertible trader at a hedge fund in New Jersey.

"The spreads tightened considerably, like by 80 to 50 basis points, [in the asset swaps and credit default swaps] afterward. The El Paso convertible bonds have really held up well throughout this ordeal."

The El Paso 0% convertibles due 2021 were quoted unchanged at 40.75 bid, 41.25 offered. The El Paso 4.75% convertible preferreds were quoted up 0.5 point to 37.3 bid, 37.65 offered, and closed on the NYSE up 0.4 to 37.8.

El Paso shares ended up 6c to $23.89.

Generally, the additional downward pressure that traders had anticipated came to pass throughout most of the session as the market opened in reaction to the late Tuesday news from Manugistics. The software maker warned that results will fall short of expectations and said it would not become profitable as planned during the next quarter, but will post a loss of $16 million to $18 million.

Techs saw a slight comeback, however, late in the day as the software giant Oracle said it would meet expectations in the coming quarter.

"The size of the shortfall is surprising considering management said last month that it had closed almost 50% of the forecasted license revenue in the first two months of the quarter," said Morningstar analyst Mike Trigg.

"There are many reasons to avoid the stock in addition to this latest news. Investors need substantial evidence that information-technology spending is improving. The company also needs to improve the quality of its earnings."

Given this weak guidance, Manugistics indicated cost reduction plans will be implemented immediately, but details are not expected to be disclosed until its quarterly earnings call on June 27.

Despite the setback, the Manugistics convertibles held up rather well but were quoted down 2.75 points to 68.5 bid, 69.5 offered as the stock lost $2.04 to $5.90.

Much of the tech sector still ended lower, however, and semiconductor names lead the decline.

Retailers, however, gained ground. New paper from Gap and Skechers were among the biggest risers in that group, traders said.

Homebuilders - Lennar and D.R. Horton - and most financials were also higher, as were industrials and manufacturing names like SPX and Lennox.

"There was a bend toward quality, although I wouldn't call it a flight to quality," said one dealer.

"It's more like there is a gradual shift taking place, a little bit sold here and there and a little bit bought somewhere else. No real exodus going on."

Williams saw more sellers than buyers, however, as federal energy regulators threatened to revoke its right to sell power at market-based rates because it has not convinced the regulatory body that it did not manipulate prices during the California energy crisis.

Atter getting hit hard for two days, though, traders see buyers stepping in soon on the weakness.

"I think there's fundamentally a lot of faith in the credit and in the story," said a trader at a convertible fund in New York.

"Most of this decline is really a matter of bad PR. Williams hasn't handled this matter very gracefully. I don't think it's going to end up like Enron or Adelphia."

The Williams 9% mandatory was quoted down 2 points to 13.5 bid, 14 offered, and closed 1.92 lower on the NYSE to 13.73. Williams shares fell $1.89 to $9.12.

General Motors also could see some upward movement as the recent pullback becomes a buying opportunity, a dealer said.

Bear Stearns raised its estimate for the automaker's second-quarter and full year EPS estimates on the back of stronger than expected production schedules for GM with second-quarter deliveries all but spoken for.

The GM convertibles, both with a par of 25, were quoted off 0.125 point. The 4.5% due 2032 was at 26.625 bid, 26.75 offered and the 5.25% due 2032 at 27.45 bid, 27.5 offered. GM shares closed down 36c to $59.09.

In the ongoing debate about the valuation of the Nortel new issue, the skies were no clearer Wednesday and the deal appeared to be pricing as scheduled after the close Thursday.

"At this point, we're not participating. I have nothing sanguine to say about it. We are still trying to figure out how to model it," said a convertible trader at a hedge fund in New York.

"Nominally, it looks cheap. But we're suspicious, because of where the stock is heading."

Nortel shares dropped another 20c to $1.60.

The cost of carry to short the stock is still a discrepancy, with one analyst at a shop involved with the deal saying that point has been "exaggerated."

"People are making too much of it," the analyst said, referring to the borrow cost of shorting the stock.

"On the spread, I'd perhaps use 100 basis points until Aug. 15 when the Treasury strips can be stripped out, and they will. After that, I would apply 0 to the credit risk."

Lucent's convertibles were quoted unchanged, as most holders are focused entirely on the stock what with the conversion ratios getting adjusted after the Agere spinoff, with convert holders getting a lot more Lucent shares.

"It's a game of cat and mouse with regard to the stock as [convertible holders] try to figure out where it will close and sell ahead of it," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities.

"Yesterday they were overly optimistic. Today, people sold too early and were caught short going into the close."

He said convertible holders have sold roughly 10% of their position each day since the spinoff on Monday, trying to maintain an 80% to 100% hedge.

Lucent shares closed unchanged at $3.13.

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