Market stalls on terrorist alert in advance of attack anniversary

By Ronda Fears

Nashville, Tenn., Sept. 10 - Activity in the convertibles market was very light on the eve of the anniversary of the Sept. 11 terrorist attacks on the U.S., as federal authorities issued an alert. Outside of a new issue in the market, there was little impetus to spur activity.

"In the market overall, people are nervous that there could be an attack on the anniversary," said John Levin, head of convertible research at JPMorgan.

U.S. Attorney General John Ashcroft said Tuesday the U.S. is on orange alert, the second highest level, due to reliable information that the Al Qaeda is planning to make an attack on the anniversary of the 2001 assault.

In memory of the attacks, the stock market won't open until 11 a.m. ET on Wednesday.

In a thin market, Hartford Financial Service Group's new deal was met with enthusiasm, gaining out of the gate after pricing at the aggressive end of price talk.

The new 6% mandatory gained over 1.5 points from par to 51.54 bid, 51.84 asked. The stock closed up $1.01 to $47.49.

"The market is very quiet," said Jonathan Cohen, convertible analyst at Deutsche Bank Securities Inc.

"Other than the Hartford transaction, which traded up nicely after the open, not a lot happened."

The market is anticipating an uptick in issuance, but unsure of what the catalyst will be.

Many onlookers suggest that this week was hampered by the terrorist attack anniversary coming midweek and see next week or soon thereafter as a better time for issuers to bring deals.

Indeed, sources say there are lots of deals sitting on shadow calendars.

"Definitely, people have money to put to work," Cohen said.

"We haven't seen money flow out of the convertible market like we have in other markets."

Stability in the credit markets is helping, along with firmness in stocks.

"There was a huge rout in the stock market over the past couple of years, culminating with a significant slide in July," triggered in part by massive accounting issues and credit quality concerns, Cohen said.

"We're beginning to see better bidding on the credit side. We're starting to get traction."

The violent swings in market expectations concerning U.S. growth have abated for the moment and markets are range-trading, said Banc of America Securities global markets group analysts David Goldman and Jeffrey Rosenberg in a report Tuesday.

Asymmetric risk rather than realized volatility, however, are keeping both interest rate and equity volatility high, the analysts noted.

"Military strategists use the term 'asymmetric risk' to characterize things such as the war against terrorism, but it also applies to parts of the financial markets just as well," the analysts said.

"In the event of a backup of interest rates, durations would extend so rapidly as to challenge investors' capacity to hedge. We consider the scenario unlikely, but the price of hedging against it keeps vol well bid. We are skeptical of recommendations to sell volatility at this point, and take a neutral stand instead."

On Tuesday, the Nasdaq 100 volatility index was down 4.14% while the broader market volatility index was down 3.75%.

The analysts said there are asymmetrical risks in some investment-grade credits where weaker names show great sensitivity to equity prices. Ford Motor Co. is a good example.

"Were Ford's equity price to fall to $8, one might reasonably expect the spread to widen to about 550bp," the analysts said.

"That may explain why, with an implied volatility of 76% at the moment, the cost of hedging Ford with put options remains so high."

Ford's 6.5% convertible trust preferred due 2032 closed up 0.18 point to 45.14 bid, 45.20 asked. The stock ended up 10c to $10.90. Credit default swaps for Ford five-year senior paper are at 410 basis points bid, 435 basis points ask over Libor.

Some strong firmness was noted also in cable names and the radio sector as a result of some positive equity comments.

Viacom was the clear winner in the upsurge in entertainment names on bullish comments on radio and cable stocks from analysts.

The Liberty/Viacom 3.25% due 2031 gained 3 points to 94 bid, 94.5 asked with Viacom shares closing up $1.91 to $42.74.

Merrill Lynch & Co. analyst Marc Nabi, with an upbeat initiation of coverage on the radio sector, put a buy recommendation on Clear Channel Communications and Emmis Communications stock and a neutral rating on Entercom Communications shares.

Clear Channel's 0% due 2018 added 0.25 point to 48.5 bid, 49 asked. The stock ended up $1.09 to $35.20.

Among cable stocks, Cox rose after Merrill's Jessica Reif Cohen reiterated a buy rating on the stock.

Separately, Victor Miller, broadcasting analyst at Bear Stearns & Co., noted in a report that new Nielsen Media Research data bodes well for News Corp. as well as AOL Time Warner, Tribune Co. and Viacom .

Negative news from Genentech Inc. that an experimental breast cancer drug was disappointing in trials caused a mixed reaction in the biotech group.

The Roche/Genentech 0% due 2015 lost 0.5 point to 70.375 bid, 71.375 asked as Genentech shares fell $3.11 to $28.89.

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