Convertibles get a lift from stocks, but still off beam

By Ronda Fears

Nashville, Tenn., Sept 28 - Convertible traders said the market got a lift from the gain in stocks Friday, but the market is still way off the beam and many players are just not comfortable. Dealers said there seemed to be as much buying as selling, with a lot of month's end window-dressing going on. Still, many market players fear that money being taken out of the market right now is going elsewhere, in search of safety, and several analysts recommend investors buy on the current weakness.

"I'll tell you how it is right now," said a convertible trader in Chicago. "I put in a low-ball bid, or what I thought was low-ball, and got a hit right away, and they asked if I wanted more at that price."

It is a bit unsettling to think the market has been routed to such a degree, the trader said. Many players are trying to resist the temptation to constantly check on their portfolios, and focus on their strategy before the markets collapsed.

"I am trying to just stick with the plan, the plan I had before Sept. 11," said an outright convertible fund manager based in New York. "It was a good plan then, and really the fundamentals have not changed. If I had something on my screen to sell, or whatever, I'm vigorously trying to hold myself to it."

There was some encouragement Friday as stocks continued to firm up, closing a more positive week on an optimistic note. The Dow Jones Industrial Jones ended up 158.74, or 1.82%, to 8839.74 and the Nasdaq added 37.85, or 2.59%, to 1498.56. Treasuries lost ground as stocks gained, but traders said the sentiment still prevails that the Federal Reserve will lower interest rates again at the FOMC meeting next week.

"It looks like a 50 basis point rate cut has been priced into the markets," said a convertible dealer. "We'd be more comfortable if we could get up over the 1500 threshold on the Nasdaq, but there's just a lot of unknowns right now. If next week remains as positive as this week, things could begin to open up quick."

While the focus largely is still fixated on quality, there was some bargain hunting in more risky areas, traders said. Discount retailers saw buying and were gaining, although Fitch said Friday it had revised its criteria for rating retail debt to take into account higher risk.

The TJX Cos. Inc.'s zero-coupon convertible due 2021 rose 1.25 points on the day to 70.75 bid, 71.25 offered as the common stock added $2.20 to $32.90. And, Costco Wholesale's zero-coupon convertible due 2017 gained 4.625 points to 85.125 bid, 85.875 offered with the common up $1.90 to $35.56.

More earnings warnings abounded, as well, but much of the news was shrugged off, traders said.

Cendant Corp. said it will take a $50 million charge, and the company reduced its third quarter profit outlook to 32c per share from 33c per share, and lowered fourth quarter guidance to a range of 15c to 19c per share compared with the previous projection of 24c per share. The Cendant zero-coupon convertible due February 2021 added 1.25 points on the day to 59 bid, 59.25 offered and the 3% convertible due 2002 gained 1.25 point to 100.25 bid, 100.5 offered as Cendant common shares rose $1.36 to $12.80.

United Parcel Service said it now expects earnings for third quarter in the range of 45c to 48c per share, reduced from previous guidance of 52c to 55c. Prior to Sept. 11, UPS said it was on track to attain earnings targets. However, during the week of the attacks, volume declined more than 10% as shippers across the country reduced activity and has not fully rebounded. The UPS 1.75% convertible gained 3.375 points on the day to 101.625 bid, 102.125 offered with the underlying common stock up $2.26 to $51.98.

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