Market dives on earnings misses, Fed undertones

By Ronda Fears

Nashville, Tenn., Aug. 13 - There was a bit more activity, mostly selling, in convertibles Tuesday as the market turned sharply south on a flock of earnings misses and undertones from the Federal Reserve suggesting the U.S. economy is not doing as well as some thought, even though interest rates were left unchanged.

US Airways' bankruptcy also was still weighing on the market, underscoring fears about corporate earnings and the economy.

"I wouldn't want to say it was uneventful," said Matt Hempel, a convertible analyst at Bear Stearns & Co.

"It's just that usually there is an issue that characterizes the market, but today that wasn't the case. There was the Fed, but no one really wanted to position in front of it."

Traders said after the Fed headlines selling began, encouraged by some earnings misses and unaided by positive comments from President Bush at his economic forum in Texas.

Volatility also turned south, traders noted.

While there was some selling going on, traders said volume was still fairly light.

"Activity is still pretty light, although nothing to be concerned about since it's August, you know," said a dealer.

"I think things will pick up in the next couple of weeks. At least people will be wanting to get into position for after Labor Day, when everything will pick up - trading and new issues."

There also may be a gain in activity as the market evaluates the prospects of a rate cut and the sectors that would impact.

"Today, it looks like the Fed will wait for a little more information, but a rate cut is now more likely than a rate increase," said a convertible trader at a hedge fund in New Jersey.

"Yesterday, I would've said the opposite. We will be waiting also, in terms of exiting some situations, until the picture is a little clearer."

Economists on the Street were largely interpreting the FOMC comments as an acknowledgement that risks have shifted toward economic weakness. Interest rates are already at 40-year lows and some onlookers feared that a rate cut would be a sure sign that there would be, or is, a double-dip recession in the works, one trader said.

Before the Fed's announcement the market was mostly lower, traders said, but the magnitude of the markdowns picked up sharply afterward.

Retail sales figures, which were in line with expectations, buoyed some retailer issues like those of Genesco and TJX Cos., but as a group retailers were still described as lower with the broader market.

"Retailers, and homebuilders, and chips were the big losers today," a dealer said.

"Anything that will be impacted by another slowdown, or stagnation, of the economy."

Six Flags fell into that category, reporting much weaker than expected results and warning that it will likely miss forecasts for the year, noting an 11% drop-off in attendance at its theme parks.

The Six Flags convertible preferred plunged 8.61 to 12.60, on heavy selling volume, as the stock dropped $6.80 to $5.06.

Six Flags reported late Monday a second quarter loss of $6 million, or 12c a share, compared to earnings of $13.4 million, or 8c a share, in second quarter 2001. Operating income was 8c a share, half of the First Call analyst consensus for 16c. Revenue dropped to $347.8 million from $356.5 million on the attendance decline.

Interpublic Group also was lower on the week-late earnings, which missed expectations and revealed the company will have to restate earnings back to 1997 to account for $68.5 million in improperly expensed charges. The ad agency also warned that it will likely miss full year targets.

The Interpublic 1.8% convertible due 2004 was quoted off 0.25 point to 76.5 bid, 77.125 asked. The 1.87% convertible due 2006 was quoted off 0.5 point to 63.75 bid, 64 asked. The 0% convertible due 2021 was quoted off 0.75 point to 72 bid, 72.375 asked. The common shares closed down 87c to $15.78.

AIG continued to suffer from the fallout of the Moody's report Friday on insurance firms' investment exposure to troubled credits, despite a statement from the company. Moody's listed insurance groups with the largest exposure to 10 high profile problem credits, showing AIG's direct exposure to these credits at $1.8 billion.

"In the case of AIG, the exposure to these credits amounts to less than 1% of its consolidated domestic life insurance invested assets and less than 0.5% of its total consolidated invested assets," the AIG statement said.

"Moreover, as previously reported, AIG has already taken significant write-downs of its Enron and WorldCom exposures. A substantial portion of AIG's exposure to the remaining troubled credits is to subsidiaries of those credits with different credit profiles than their troubled parents."

Moody's noted that many of the U.S. life insurance groups in the report are part of much larger insurance groups that have either substantial non-U.S., non-life insurance or other operations with additional capital resources available.

"This is certainly true for AIG with its highly diversified worldwide operations and $55 billion shareholders' equity," AIG pointed out.

But traders said investors were fleeing on the bad news.

"There's no tolerance for anything negative right now," a dealer said. "Of course, in these situations there are always some opportunistic buyers lurking in the shadows, waiting to snap up some of this paper. AIG certainly finds willing buyers."

The AIG 0.5% convertible due 2007 fell 1.5 points to 91.25 bid, 92.25 asked and the 0% convertible due 2031 dropped 0.5 point to 62 bid, 62.25 asked. The common plummeted $3.20 to $62.31.

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