Market conditions tough amid profit warnings, war anxieties

By Ronda Fears

Nashville, Tenn., Sept. 17 - It remained a tough market in convertibles with muted trading action amid a rash of profit warnings and the nerve-racking overhang of the U.S.-Iraq tensions.

"It was a tough market today. A lot of our market was sitting on the sidelines. They are sitting on a lot more cash than normal, too," said the head convertible trader at a major investment bank.

"I have a fund screener set up and there are lots of funds sitting on 10-12% cash. Sometimes there are restrictions against that, but even without that you wouldn't want to because you're not making that work for you. We need some new deals."

Selective Insurance Group Inc.'s small $100 million deal later this week is too small to turn a lot of heads and in fact several traders said it had not been seen trading in the gray market at all, due to the size.

Selective common shares ended off 23.9c to $23.06.

With no forward calendar, players are becoming ever more weary of poring through the secondary market for trading opportunities, particularly outright investors.

Convertible arbs have been seeing some of the pain lessen, however.

The CSFB/Tremont hedge fund index for August shows a gain of 0.85% with a year-to-date gain of 0.82%. Within the broad index, convert arbs were up 0.6% for August while off 1.96% year-to-date.

There still are not a lot of convertible buyers milling about, traders said, although selling is not widespread, either.

"Trading has been sporadic, erratic," said a dealer.

Part of the hesitation for buyers is that most of the appealing converts have gotten rich as a result of there being so few attractive issues to pick from.

"Most people are hanging on," said a convertible trader at a hedge fund in Connecticut.

"We're seeing some weakness in a few of the names that really had been bid up too far, so now they're coming back down to reality."

American International Group, WellPoint Health Systems Inc., AmerisourceBergen Corp, Network Associates Inc. are a few examples in that category, the trader said.

Amerisource Bergen fell sharply Tuesday, however, along with other drug wholesalers on the heels of D&K Healthcare Resources slashing its profit outlook for fiscal first quarter earnings by as much as 58% because of lower-than-expected sales.

The Amerisource 5% convertible due 2007 fell 5.5 points to 151.75 bid, 152.25 asked as the stock dropped $3.41 to $69.65.

Adaptec was down as a result of its own warning after the close Monday.

The data storage company warned its second quarter revenues have slumped as a result of the soft market. The company said it plans to cuts about 10% of its workforce and record a related $7 million charge.

The 3% convertible due 2007 were quoted at 72.625 bid, 73.625 asked and the 4.75% due 2004 at 89.5 bid, 90.5 asked. Adaptec shares closed down 30c to $5.18.

AOL Time Warner Inc. and Tyco International Inc. were holding firm against the news out on those names.

"Nothing going on at AOL or Tyco right now will move the convert," said a trader.

"Of course, both of those situations are very explosive, so everything could turn around on a dime. AOL probably more so than Tyco, right now. It seems a lot of the headline risk has subsided for Tyco."

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