Prices, trading volumes gain on short covering, stock bounce

By Ronda Fears

Nashville, Tenn., Aug. 6 - Although there were still a few earnings disappointments, convertibles trended higher in tandem with stocks that gained on growing speculation that the Federal Reserve will cut interest rates to give the struggling U.S. economy a boost toward recovery.

Volumes were also higher, but traders noted that much of the price gains were mark ups in stocks due to short covering by hedge funds.

"Trading picked up a little today. There was some buying, but a lot of the move in converts was because of short covering in the stock," said the head convertible trader at a major investment bank.

"Really, we did have a lot more calls today, on Mirant, Level 3, Cablevision, Charter, Omnicom, Gilead Science, several names."

Another dealer said there also was interest in Lucent, Calpine, EchoStar and Interpublic, among others.

Most of the convertible universe closed in the green, but there were a few red areas.

Amkor Technology Inc. was lower on a credit downgrade by Standard & Poor's.

Interpublic was lower again due to ongoing concern about it delaying its earnings release for a week, but competitor Omnicom rebounded on its earnings that were in line with expectations.

"There may have been some bargain hunting going on, but it probably was limited to the mandatories that are out there," said a convertible trader at a hedge fund in New York.

"Otherwise there's not really many bargains in converts. Unless you're willing to take on some hefty risk levels. Some of that's okay, it can boost your portfolio, but most of that paper isn't trading much right now."

Some market watchers are hoping that the talk of an interest rate cut would stimulate some rebound for businesses but others think it will be a step in the wrong direction.

"A rate cut now would be detrimental to the psychology of corporate leaders right now I think," said the portfolio manager of a hedge fund in New York.

"I saw on the tape that Goldman and Lehman are forecasting an easing through year-end to a 1% policy rate. It seems to me that that would be a signal to businesses that is the opposite of what the market is saying.

"The markets are saying that these companies are going to have to become more efficient, if that means consolidation or whatever. They have to show real profits or a business plan that is clear and plausible.

"It doesn't seem to make sense for the Fed to throw money at this problem when investors won't."

In any event, stocks soared Tuesday and a fair amount of the gains was attributed to hopes that there would be a rate cut come out of the Fed meeting next week. Other factors were important as well, traders said, which included a sense that stocks were oversold.

There also was market talk of a German asset allocation shift out of bonds and into equities, which one dealer said gave U.S. investors some encouragement to go "shopping for bargains."

Some of the buying seen in converts was in the biotech and drug groups, which have been hammered on concerns about pending drug approvals, as Gilead Sciences got an FDA panel nod for its hepatitis drug.

Gilead Sciences was halted for the day because of the news pending but several drug and biotech issuers were higher. Amgen was one of the stronger names.

Cable names were higher, with Cablevision, Comcast and Charter Communications among the leaders.

Telecom and wireless issues were mixed but mostly lower. Level 3 and Nextel were lower while Motorola and Sprint PCS were higher. Nortel was flat.

Level 3's 6% due 2009 was quoted down 1.375 points to 35 bid, 36 asked at one shop and at 34.625 bid, 26.625 asked at another. The 6% due 2010 was quoted down 0.75 point to 37 bid, 39 asked at one shop and 33.5 bid, 35.5 asked at another.

A downgrade by S&P, including the two convertible notes to CC from CCC-, put pressure on the issues, but one trader said the brunt of the negative news came from a part of the rating action that mentioned Level 3 may have to do a distressed debt exchange or file bankruptcy.

"Some of the bankruptcy talk is countered by the fact that Warren Buffett invested in Level 3 as recently as last week but even the Oracle of Omaha has the right to make a bad decision," the trader said.

S&P said in the ratings release that given Level 3's substantial leverage, weak interest coverage and limited liquidity, the company is not well positioned to deal with the weak fundamentals in the data transport industry.

Furthermore, S&P said that with Level 3 now positioning itself as an industry consolidator, which the company mentioned as a use for some of the $500 million raised by the recent convertible private placement, additional acquisitions would likely further strain liquidity.

Although Level 3 has taken steps in the right direction to address liquidity concerns, the rating agency said: "S&P remains concerned they are not sufficient to eliminate the possibility of a distressed debt exchange or bankruptcy filing."

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