Market lacks direction, hoping new deal flow will pick up soon

By Ronda Fears

Nashville, Tenn., Aug. 26 - Convertibles were holding firm for the most part Monday as stocks seesawed before ending in slightly positive territory. Volume was decent, traders said, but there was no direction.

Market watchers and players are still hopeful that there will be some new deal activity this week in advance of the long Labor Day weekend. After the holiday, a heavier deal flow than seen this summer is expected.

"We haven't heard a peep" about a new deal announcement Monday, said Stuart Novick, a convertible analyst at Salomon Smith Barney.

"It's really surprising, because we heard the buzz last week, too. There is a dwindling amount of supply. The two deals last week were small but investors liked them. They showed that you don't have to be in a favorable industry to bring a new deal."

Both were in more out-of-favor groups - CenturyTel in traditional phone service and Harris Corp. in telecom equipment. They were small deals, $150 million and $125 million, so trading has already trailed off in that paper to practically nothing changing hands.

Morgan Stanley put redemptions, calls and maturities so far this year at $31.1 billion (face) of convertibles, with a market value of $23 billion. Through the end of July, there had been $47.8 billion of convertibles sold this year. A fair amount of convertible paper changed hands Monday, but traders said it was bits and pieces.

"There was some buying in a few oil and gas names, and Lennar," said a convertible dealer.

"It wasn't really something that could be called a trend. There's not enough big oil and gas names in the convertible market to draw a lot people in. But oil prices gaining on the possibility of a war with Iraq helps a lot of the smaller names in that group."

Pride International's 2.5% convertible due 2007 was up 1.375 points to 108.5 bid, 109 asked. The stock rose 36c to $14.36.

Lennar was building on home sales data, the dealer said, that "seems to paint a picture that the housing market is bulletproof from this recession."

July existing home sales rose 4.5% and new home sales surged 6.7%, the U.S. Commerce Department reported Monday, as low mortgage rates fueled real estate activity.

Corporate spreads have tightened on increasingly positive signs from the stock market, and that has eased risk premiums as well, but spreads are still wide.

"While risk premiums in hedging equities have fallen, credit spreads, which have tightened somewhat, still remain wide, indicating that there might be further scope for tightening," said Banc of America Securities head of global markets research David Goldman and head of credit strategy research Jeffrey Rosenberg in a report Monday.

"While risks continue to abound - the weekend discussions on friends and family allocations in the telecom sector the latest - we remain cautiously optimistic on continued [investment grade] credit spread improvement."

Convertible traders said there seems to be more focus on the high grade group of convertibles in the busted category, but interest has been gaining in high yield converts. Busted converts make up more than half of the market.

"A lot of people are looking to pick up some yield," said a trader at a convertible fund in New York.

"Pricing is getting more reasonable as the spreads narrow, but you run into problems with certain names or issues not being very liquid. It is like searching for a needle in a haystack, to match up all the parameters you're looking for."

Thus, the need for new paper is crucial.

Adding to the demand created by a stagnating market and redemptions is the general belief that there is still money flowing into hedge funds, which account for 70% or more of the activity in the convertible market.

There may not have been any sector trends or strong moves toward certain flavors of convertibles, but there definitely was some fascination with Lucent Technologies on Monday.

In very strong volume, Lucent shares closed up 37c to $1.87.

Lucent's 7.75% convertible due 2017 soared 8.75 points to 52.625 and the 8% due 2031 climbed 6.875 points to 46.625.

"I think there may be some people looking to re-establish a position in telecom and telecom equipment, at a place they perceive to be the trough, so they are in position for some really nice gains when the tide turns," said a dealer.

"There have been a lot of high-profile investors recently making moves in the telecom area and that has gotten a lot of attention."

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