Chips tumble on Intel news; broader convertible market trading in sideways pattern

By Ronda Fears

Nashville, Jan. 15 - Chip issues slid as Intel Corp. slashed its capex budget, although results came in better than expected. Overall, convertibles traded sideways, though, with many players sitting on the sidelines.

Outside of the tech sector's troubles, Charter Communications Inc. fell on a ratings downgrade and fears about recovery levels in a restructuring.

"It was one of the quietest days we've had in a while," said a dealer.

State Street Corp.'s new deal, however, moved up almost 5 points after pricing aggressively.

Sources said once the bulk of earnings are out, the pace of new issues is expected to pick up somewhat.

"Once earnings are behind us, there should be several deals emerge," said a salesman.

"There could be some of a pullback related to sentiment, or if we go to war, but even if nothing else happens this month the Tyco deal will make for a decent month."

Despite Intel's better-than-expected earnings report, the market was fixed on the fact that the chipmaker reduced its spending budget, which seemed to be interpreted as an ill omen for other corporate spending habits in the coming year.

The news hurt the broader stock markets, which also were reacting to war jitters.

Credits stumbled again, with high grades losing some ground and high yields said to be flat, but some observers were taking heart from volatility coming in.

Shorter maturity stock options are trading at lower implied vols than longer-maturity options, said Banc of America Securities equity derivatives strategist Dean Curnutt.

"Coming at the peak of earnings season and in the midst of international tensions, this is a strong statement by the market that it believes the turmoil in the credit cycle is now in the past," he said.

"Volatility traders, to be sure, see an opportunity to lock in short-term protection at relatively cheap levels," Curnutt added.

"From the standpoint of credit markets, however, the structural shift in the volatility term structure is another sign of an improving credit cycle."

On the Intel news several convertibles in the chip sector suffered - Teradyne Inc. and ASM Lithography - along with other related tech sectors like computers - Automatic Data Corp. - and network security - Symantec Corp.

Advanced Micro Devices Inc., another chip name, however, was holding its own ahead of reporting earnings after Thursday's close.

Teradyne posted a wider loss and also cast a pall on the spending outlook with a forecast for flat sales in first quarter. The 3.75% convertible due 2006 were quoted down about 3 points to 91.5 bid with the stock closing down $2.49 to $12.99.

Automatic Data had its own headlines to contend with. The company posted a slight drop in quarterly income, but also scaled back its 2003 revenue growth forecast. The ADP 0% convertible due 2012 was quoted down 2.5 points to 95.5 bid, 96 asked. The stock fell $3.17 to end at $36.31.

Symantec lost ground during the session on the Intel news, ahead of reporting earnings after the closing bell. But it began regaining some ground in after hours trading when it posted better-than-anticipated results and said it expects results inline with analysts' forecasts for fiscal fourth quarter and in fiscal 2004.

CIBC's equity analyst upgraded the stock, noting Symantec provided a more encouraging IT spending outlook and a strong quarter with improving gross margins.

Wachovia Securities, Inc. analysts, however, suggest convertible holders step away and for those interested in exposure to the segment look at Network Associates Inc.

The Symantec 3% convertible due 2006 lost 3.75 points to 154 bid, 155 asked while the stock closed down $1.29 to $46.05.

"We believe investors should take profits as the bonds have had a strong run," said Wachovia analysts Henry Voskoboynik and Brian Park in a report Wednesday.

"In addition, the fiscal fourth quarter (ending in March) is a seasonally weak quarter, though guidance should be above expectations. In addition, we believe investors wanting exposure in the antivirus segment should look to swap out of Symantec and into Network Associates."

The convert is currently trading with an implied credit spread of 130 basis points assuming a volatility of 50%, the analysts noted, although they believe an appropriate credit spread for Symantec is 425 basis points.

For sure, investors were making a leap out of Charter, traders said.

Charter took a dive, with the converts falling by 2 or more points and the junk bonds losing about 6 points, as Moody's cut its credit. The downgrade, and a cable industry report, sparked speculation that bondholders may fare worse than expected in a restructuring.

Charter's 4.75% convert fell 2.25 points to 18.5 bid and the 5.75% converts dropped 2 points to 20.75 bid. The stock ended down 19c to $1.29.

Telecoms and telecom equipment makers were pulling back for the most part Wednesday, but Harris Corp. soared on its earnings news and the Alcatel headlines earlier this week.

Harris posted flattish results for fiscal second quarter but stood by its outlook for fiscal 2003, which was reduced in October due to weakness in the telecom market.

The 3.5% convertible due 2022 gained 3.25 points to 107.5 bid, 108 asked while the stock closed up $2.19 to $31.13.

Just as the company reported earnings, around midday, Bear Stearns issued a report recommending the converts to both hedge as well as outright accounts

"The company has quietly demonstrated a strong track record of growth and consistent earnings within the government divisions, while the commercial segment is showing early signs of renewed life," said Bear Stearns convertible analysts in the report.

"The convertible has nice carry (3.25%), models cheap (2%), and trades below the implied volatility (32% vs. implied between 35%-40%)."

At 104.25 - where the Harris convert was before Wednesday's jump - using a spread of 250 basis points over Treasury and a volatility of 37%, Bear analysts said its implied value was 106.5, or 2.25 points cheap.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.