Stock plunge, earnings worries sideline players, pressure prices

By Ronda Fears

Nashville, Tenn., July 10 - It was a depressing day in the convertibles market as stocks fell sharply for the third straight session, traders said. Heightened worries about corporate earnings and other concerns, like corporate governance as Qwest revealed a criminal investigation into its business, weighed heavily and sidelined most players.

"All I'm seeing is red," said a convertible trader at a hedge fund in New Jersey.

"It's very depressing."

Amidst nearly everything heading south, biotech stocks were hammered and that was largely blamed for the broad stock indexes falling so hard. Automakers also were slammed notably.

The Dow Jones Industrial Average fell 282.59 points, or 3.11%, to 8813.50 while the Nasdaq lost 35.11 points, or 2.54%, to 1346.01.

"Trading was spotty," said Jeff Siedel, head of convertible research at Credit Suisse First Boston.

"There's no leadership to this market. You don't find a lot of buyers, only sellers."

Players can't really even shop the market, he said, because sellers are so eager that you have to be serious about accumulating a position if you put a bid out there.

Some hedge fund players had been getting into position for an uptick in the market and many have already been burned. There have been others, however, that have maintained a negative bias to stocks throughout.

"This is crushing to me today. I just started building a position in biotech," said a convertible hedge fund manager in New York.

"I'm putting that on the back burner for now except for a couple of names I can pick up, or am comfortable with, at a bargain. Otherwise, I'm going to hold on to what I have and wait this out."

Biotech and drugs names were among the bloodiest in the blow to stocks Wednesday, but traders said the corresponding convertibles held up rather well.

"Biotech stocks were absolutely slaughtered today," said a convertible dealer.

"The converts, though, did pretty well in the face of that. Almost all the biotech converts are busted and on a day like today you're glad of it because it provided some cushion."

Among the hardest hit biotech converts were Gilead Sciences, down 11 points, and Alkermes, down 7.5 points. Amgen also took a blow with the converts losing 6.875 points.

Other biotech names mentioned in the slide included OSI Pharmaceuticals, Enzon, Abgenix, Medimmune, Protein Design Labs, Cephalon, Medarex and Affymetrix.

In addition to the Qwest news, S&P shook up the market with a sudden shift in its S&P 500 index.

Auto makers added more pressure, declining on concern that pricing competition would cut into profits.

General Motors and Ford both plummeted.

Ford's 6.5% convertible trust preferred due 2032 was quoted by a dealer down 1.625 points to 52 bid, 52.34 asked. The issue closed on the NYSE down 2.48 points on the day to 51.67 on heavy volume. Ford shares ended down $1.12 to $13.99.

GM's 4.5% convertible note due 2032 was quoted down 0.625 point to 24.37 bid, 24.5 asked and the 5.25% convertible note due 2032 down 1.125 points to 24.125 bid, 24.5 asked by a dealer. The 4.5s closed on the NYSE off 0.32 point to 24.77 on low volume and the 5.25s down 0.91 to 24.5 on heavy volume.

The shift in the S&P 500 was a positive event for a couple of convertible names, United Parcel Services and Prudential Financial, but negative for another, Nortel Networks.

S&P said it was dropping foreign companies from the S&P 500 index to create a U.S.-based benchmark. Among the seven to be cut was Canada-based Nortel.

Among the U.S. replacements were UPS and Prudential.

UPS'1.75% convertible note due 2007 was quoted up 2 points to 103.5 bid, 104.375 asked by one shop and at 102.625 bid by another. UPS shares gained $2.51 to $63.25.

Prudential did not rise as nicely, which one trader attributed to concerns about the insurance firm's profitability.

The Prudential 6.75% mandatory edged up 0.07 point to 54.08 as the underlying stock gained 28c to $30.59.

Nortel's 4.5% convertible note due 2008 was quoted down 1.75 points to 42 bid, 44 asked by one shop and at 44.375 bid at another. Nortel shares closed off 22c to $1.33.

Otherwise, traders said Nortel would have gained along with other networkers like Lucent Technologies and Juniper Networks as Merrill Lynch upgraded its stock rating on Cisco Systems, saying business fundamentals are improving.

Gains in Lucent and Juniper were small, traders said, but noteworthy in the face of declines elsewhere in the market.

Interpublic Group fell after Merrill Lynch cut its second-quarter earnings estimate for the advertising agency, compounding an already steep drop in the stock. Interpublic shares have fallen nearly 20% since June 12 when its rival Omnicom Group was hit with accounting questions, one trader said.

The Interpublic Group 1.8% due 2004 was quoted down 1.5 points to 87.5 bid, 87.75 asked. The 0% due 2021 lost 1.125 points to 80.125 bid, 80.65 asked and the 1.875% due 2006 dropped 0.625 point to 77.5 bid, 78 asked. Interpublic Group shares fell $1.14 to $23.01.

Omnicom converts have leveled off recently and held firm to a 38c decline in the stock to $46.62, the trader said.

AOL Time Warner also was holding firm after announcing Monday that it had secured $10 billion of new bank credit facilities. The credit was improving in the face of a stock decline due to the new bank line, sources said.

The AOL 0% due 2019 was quoted unchanged at 50.375 bid, 51.375 asked. The stock closed down 88c to $13.11.

Other long-suffering credit stories not faring as well despite recent actions aimed at bolstering liquidity were Tyco and Calpine, both seeing moderate trading activity in the converts Wednesday.

Tyco's two 0% convertibles were both lower as the stock dropped 85c to $13. The 2020 issue was quoted down 1.125 points to 46.375 bid, 46.875 asked and the 2021 issue down 0.5 point to 52 bid, 52.25 asked by one dealer. Another put the 2020 issue at 46.875 bid and the 2021 at 52.125 bid.

Calpine's 4% convertible note due 2006 was quoted down 2 points to 67.5 bid, 68 asked at one shop and at 68.125 bid at another. The stock closed down 53c to $5.35.

CSFB's Siedel said investors should be seriously looking at mandatory convertibles, which have accounted for some 25% of new issues this year.

"There's tremendous yield in that market right now," Siedel said.

"At least you can clip coupons," he added, even if the stock slides. But on the upswing, most mandatories offer greater participation than bonds, particularly the busted lot that dominate in the convertible market right now.

Buyside sources have been hoping, to no avail, for a new issue calendar and sellside sources say it's likely to be a long, dry summer in regard to issuance.

Some still think there is a possibility for USBancorp and/or Household International to refinance the puts coming up on their converts but there has been no indication yet.

Many believe there will not be any new issues until after the earnings season is over because of the severe concern about profitability.

On that, Siedel says, hinges the end to the market's drought, both in terms of prices and activity.

"It ends with solid earnings, clean numbers and some profitability," Siedel said.

"There's going to be cynicism in the immediate future, maybe two quarters. The market is very skeptical, and rightly so. At some point, it's going to turn around. But when is hard to say."

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