Convertibles mixed, anticipate hit to chips on AMD warning

By Ronda Fears

Nashville, Tenn., June 18 - Convertibles were mixed and largely lower as tech and telecom stocks took another dive, frustrating hopes of a continued rally.

"Geez, you just want to scream," said a convertible trader at a hedge fund in New Jersey.

"This market just can't find its legs. We had been thinking we were pretty close to the bottom, and still do. It's just frustrating right now."

Going into Wednesday, however, players are anticipating another hard hit to issues in the chip sector in response to the warning from Advanced Micro Devices after the close. Chip issues were slightly lower Tuesday.

Retail issues were also weak on some profit taking in anticipation of slower sales through the summer. Even Best Buy was sold off although it reported better-than-expected results.

Homebuilders, however, were continuing to firm although more and more onlookers are expecting the sector to level off, if not decline. One trader noted that retailers geared to the construction industry, like Lowe's, headed south in a huge sell-off.

"With the homebuilders, you have to be a little nervous," said Rao Aisola, head of convertible research at Bear Stearns & Co.

"Consumers are leading the recovery and consumers are over-extended. You have to wonder, how much longer will it last? As consumer spending cools, this will follow through to the homebuilders."

Investors have been nervous for some time now, but waiting for a cue to exit and take their profits.

"I have thought for quite some time now that this can't go on, but I keep hearing nothing but more of the same from the homebuilders I'm talking to," said a hedge fund manager in New York.

Lennar was on a tear Tuesday after reporting a merger Monday and as investors looked to get out of tech holdings.

Lennar's 0% due 2018 was preferred over the 0% due 2021 due to the shorter put date, traders said. The 2018 convert is putable in July 2003 at 56.231, whereas the 2021 convert is not putable until April 2006 at 46.81.

The 2018 gained 1.75 points to 74.75 bid, 75 offered and the 2021 issue rose 0.75 point to 45.5 bid, 45.875 offered.

Lennar shares closed higher by $1.80 to $57.30.

D.R. Horton also rose nicely. The 0% due 2021 added 1.375 points to 70.375 bid, 70.875 offered with the stock up 71c to $24.96.

"Anecdotally, what makes sense is that people are frustrated with the markets and they are taking money out of the markets to just go build or buy a house," said Stuart Novick, convertible analyst at Salomon Smith Barney.

But retailers targeting construction and remodeling consumers dropped sharply Tuesday amid a widespread sell-off in the retail sector.

The Lowe's 0% due 2021 fell 3 points to 80.875 bid, 81 offered and the discount 0.861% due 2021 dropped 2.5 points to 97 bid, 97.5 offered as the underlying shares lost $2.59 to $45.20.

Retail names were "really slaughtered on a huge sell-off in advance of what is expected to be a very slow summer," as one dealer put it.

Summer is typically a slow period for retailers, but market onlookers noted that virtually the entire group was punished. Even those with improving results, like Best Buy.

Best Buy was punished due to events on several fronts, traders said.

"First, they're outlook for second quarter is not what the market has been expecting," one trader said.

"Best Buy was also hurt by the slowdown in PC sales, and that turned out to be what AMD was crying about too."

Best Buy posted a 27% gain in fiscal first quarter profits to $70 million, or 22c a share, which beat the First Call analyst projection for 20c to 22c. But the company said for fiscal second quarter its expects EPS of 30c to 32, which is below the analyst average of 33c but ahead of prior-year EPS of 26c.

The Best Buy 2.25% due 2022 dropped 2.75 points to 90.25 bid, 90.75 offered as the shares lost $3.25 to $39.01.

AMD was lower Tuesday, as well as most of the chip group, but the market expects a stronger reaction to its warning on Wednesday.

After the close, AMD said it expects a "substantial" second quarter operating loss due to a shortfall in its revenues because of lower PC sales.

AMD said revenues for second quarter are expected to be between $620 million and $700 million, versus its previous estimate in April of $820 million to $900 million.

The AMD 4.75% due 2022 ended down 1.75 points to 81 bid, 81.25 offered as the stock dropped 50c to $10.30.

Chips were mostly lower across-the-board, traders said, due to the pain in telecoms and electronics. Other names mentioned were Cymer, Lattice and Atmel.

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