Some profit taking in homebuilders, chasing gainers in financials as stocks scream higher

By Ronda Fears

Nashville, Tenn., May 8 - Convertibles roared higher as stocks went on a tear in the wake of surprisingly strong profits at Cisco Systems. The IKON Office Solutions Inc. pricing was advanced and the issue gained from par but was lower than it had been in the gray market.

Traders said there was some profit taking in key areas like homebuilders and a few buyers were chasing financials, or more specifically broker paper that has been beaten down lately. In the tech area there were some sharp markups, but traders said most of the activity was in the stocks - short covering and the like.

"I think today took everybody by surprise," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities.

Unexpected strong profits at Cisco wowed the stock market, shooting the Dow Jones Industrial Average up by 3.1% and the Nasdaq up 7.8%.

It was the biggest stock rally since the rebound after the post-Sept. 11 sell-off, traders said, noting also that it follows a string of consecutive losses over the past two weeks and the market hasn't been able to hold onto any recent gains for long.

"The market was on a tear today and it was very hectic," one dealer said.

"But this probably won't last. None of the rallies of late have been able to hold water."

The Cisco news late Tuesday on the heels of the Federal Reserve leaving interest rates unchanged spurred buying in tech stocks, but traders saw little volume in the converts although there were some sharp markups.

Brocade, Emulex, Nvidia and Network Associates were all notable gainers, spanning several subgroups in the tech sector.

Corning also gained, traders said, but on buying as some high-yield investors snapped up the paper after Moody's downgraded the credit to one notch above junk.

Moody's cut Corning's two convertible notes to Baa3 from Baa1 and is keeping the ratings under review for possible further downgrade. Moody's expressed growing concern that the recovery in telecom operations will be delayed until well into 2003 and telecom revenues may not stabilize until 2004.

The Corning 3.5% due 2008 rose 5 points to 93.5 bid, 93.75 offered with the stock up 52c to $6.78.

"If you were under-invested, you were frantic today, buying," said a hedge fund manager in New York.

"We were selectively deciding where to take some profits."

Traders said there were some sellers taking profits in homebuilders, a sector that has been on the rise but had begun to make some holders nervous because of rising interest rates that might curtail building. D.R. Horton and Lennar were both slightly lower on selling.

For the most part, however, the market was chock full of bargain hunters, bottom fishers.

"It was head-spinning," trying to keep up with the increase in trading activity, said a hedge fund trader in Connecticut.

Financials, and particularly brokers, were a focal point as the SEC unveiled new rules for research analysts, traders said.

The SEC unanimously approved new rules to require analysts to disclose more about their ties to companies they cover after the high profile headlines about Merrill Lynch Internet analysts publicly touting stocks they slammed privately as junk.

Brokers had been hit hard when the scandal broke, but bounced back nicely on the news that the matter might be drawing to a close.

Merrill Lynch's convertible floater due 2032 added 1.375 points to 97.25 bid, 97.5 offered with the stock up $3.31 to $43.95. Lehman Brothers' convertible floater due 2022 rose 1.5 points to 102.5 bid, 102.75 offered as the common shares gained $4.10 to $64.50.

Other financials rose, too, mostly from the insurance group, however.

Ohio Casualty gained after posting a quarterly profit against a year-ago loss, noting it increased policy premiums. The firm, which focuses on car and home insurance, post first quarter net income of $26.9 million, or 44c a share, versus a net loss of $4.1 million, or 7c a share, a year earlier.

The Ohio Casualty 5% convertible due 2022, which has been a riser since pricing in mid-March, added 1.125 points to 112.375 bid, 112.625 offered with the underlying stock up 34c to $20.31.

What with a lighter new issues calendar, particularly in terms of deal size, and richening in secondary prices, investors are looking for research and new strategy angles to put their cash to work.

One hedge fund manager in Chicago said strategies like special situations and event-driven situations are looking more appealing as a way to make money. Otherwise, he said, players are having to "scratch around" to find something.

"Everybody's looking for new and more exotic ways to make money," said Yaw Debrah, head of U.S. convertible research at Merrill Lynch.

Thus, sellside research and market strategy ideas are a premium, right now.

But, players are also expecting that issuance could pick up soon and many were surprised that nothing was launched Wednesday with stocks soaring higher.

"I think there are some deals that could have come today but they were caught off-guard a bit," said one market source.

IKON's new deal was advanced to price early and was upsized to $300 million from $250 million.

It was quoted at 101.25 bid, 101.5 offered after the first day of trading. That was up from par, but down from the pre-market quote of 2.5 to 3.5 points over par before the open.

IKON shares ended off 50c to $11.15.

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