Faithful players trudge on with buying strategy amidst retreat

By Ronda Fears

Nashville, Nov. 7 - In the lingering debate on the economy in the aftermath of the Federal Reserve's interest rate cut, the bears won out - for now.

At least that's what the bulls in the convertible market are saying. They didn't skip a beat, continuing to buy amid the retreat in stocks, as they believe the upswing really is real and recovery is under way.

"We're seeing some weird things in convertibles, situations where buyers are pushing the converts up while the stock is going south," said a buyside trader.

"A lot of these bonds, Agere, Conexant, Calpine, are all over the place. The bid/ask spreads are all out of whack. It gets down to a lot of traders don't know where to price these things, so there are some opportunities for the so-called believers."

Traders said the focus continues to be on the tech group, but in a fairly narrow selection of bonds. Other buying interest was noted for a few of the biotechs and retailers.

The downturn in stocks was disappointing, indeed, particularly for hopeful players.

"I'm pretty disappointed," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"I'm surprised that there's such an overhang in the market after the Fed cut rates by so much. I think it's wrong. I'm a buyer down here [at these levels]."

Coming out of a recession some cyclical blips in economic data is expected, Seidel said, but "I'm more bullish now than I've been in a long time."

Seidel said his team is looking at tech names, as "that's where there's good value in the convert market and they are trading with reasonable deltas."

The credits, particularly in techs, are misunderstood and create an opportunity because the bond floors have been miscalculated, he said.

"I think the credits are misunderstood," Seidel said.

"There are lots of [tech] companies out there with a lot of cash. Once you understand the credit, you can get comfortable [with buying tech issues]. But, it's on a name-by-name basis."

Electronic Data Systems Inc., in fact, got strong two-way action with some buyers emerging late in the session, traders said, while the stock was getting hit on news that talks to buy Procter & Gamble Co.'s back-office operations had fallen through.

The EDS 0% bond (A) was quoted ending up 0.25 point to 74.125 bid, 74.625 asked. The mandatory was quoted by a dealer up 0.75 point to 17.75 bid, 18.75 asked, but on the NYSE it closed down 1.43 points to 18.49.

EDS stock closed down $1.93 to $14.87.

Skyworks Solutions Inc.'s new deal, which meant Conexant Systems Inc. got paid toward the sale of its wireless semiconductor unit to Skyworks, pushed Conexant converts higher, traders said.

The Conexant convertibles were both quoted up by 11 points at one shop, putting the 4s (CCC+) at 45 bid, 47 asked and the 4.25s (B-) at 48 bid, 50 asked.

Conexant shares closed off 12c to $2.07.

Skyworks' new deal gave back some ground, but in general players are still ecstatic with its performance so far.

The new 4.75% bond was quoted down 1 point to 112.625 bid, 113.625 asked at one shop. But it was quoted up 1.125 points to 115 bid, 116 asked at another.

Skyworks shares ended off 23c to $8.01.

Agere Systems Inc. was getting a backlash from buzz about a possible reverse stock split, but traders said there were buyers late in the day.

The 6.5% convertible due 2009 (B) was quoted down 8.5 points to 61.5 bid, 62.5 asked at one shop and down 11.375 points to 68.5 bid, 71.5 asked at another.

Agere shares closed down 28c to $1.22.

Buyers pushed Allergan's new 0% convertible (A-) up slightly, traders said, as the stock lost $1.10 to $54.85.

There also were late buyers for Bisys Group, traders said, as the bond dropped in tandem with the stock.

Bisys Group's 4% convertible due 2006 was quoted down 5.5 to 94.125 bid, 94.625 asked. The stock closed down $1.26 to $18.13.

Calpine Corp. also gave back some ground.

The Calpine 4% convertible due 2006 lost about 2 points to 41.625 bid, 42.625 asked.

Calpine shares ended off 42c to $3.19.

Several retailers, however, were on a tear northward after October sales figures were a pleasant surpise.

"The comps in October were better than we expected," said a dealer.

"That is being interpreted to mean that there's an improved tone for holiday shopping. I think people will probably feel better about spending, now that they know interest rates aren't going up just yet."

Gap Inc. was a noteworthy winner in the retail space, the dealer said.

The Gap 5.75% due 2009 (BB+) added 4.25 points to 113.875 bid, 114.375 asked.

Gap shares ended up 65c to $13.42.

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