Rising volatility, lower stocks create mixed bag

By Ronda Fears

Nashville, Tenn., July 9 - It was a mixed bag in the convertibles market Tuesday, traders said, on rising volatility and declining stocks.

"There wasn't really any clear direction within sectors," said a dealer.

"We saw action in techs, chips, telecoms, a few cable names and some defense. But even within the groups, there were both winners and losers."

Volatility has been on the rise this summer, which is an unusual pattern, after a deep slump in first quarter and that is creating lots of trading opportunity, traders said.

"Going forward, there's probably going to be some opportunity to sell volatility," said Rao Aisola, head of convertible research at Bear Stearns & Co.

"In June and July it usually gets crushed. But this summer, volatility started going up sometime in May and hasn't looked back."

Going into May, he said, volatility was at about 36% and had climbed to around 64% by the end of June.

Traders said buyers and sellers are more selective in general, but activity is even more stilted and deliberate right now due to the earnings season.

Adrian Miller, a convertible analyst at Salomon Smith Barney, said players are having to become accustomed to poring over balance sheets for opportunities in the "destroyed names" taken lower within sectors.

Also, he said, the market is having to come to grips with the richness of the few issues linked to higher rated names that have not been battered.

"The stuff that's out there without any hair on it has been bid up and is rich," Miller said.

"At some point, you've got to just go ahead and jump in because you figure that it's going to just get richer."

The slide in stocks eased a bit Tuesday, but with Monday's big plunge most of last Friday's gains had been erased. Nasdaq ended down 1.74% and the Dow Jones Industrial Average dropped another 1.93%.

"We saw some buying in telecom," said a convertible dealer. "But there was more selling in chips and cable-type names, DISH."

Lucent Technologies Inc. and Nextel Communications Inc. were both higher but Nortel Networks Corp. slipped.

Lucent's 8% due 2031 gained 3.625 points on the day to 55.125 bid, 55.375 asked and the 7.75% due 2017 rose 4.625 to 55.875 bid, 56.375 asked. Lucent shares added 23c to $2.04.

Nextel's converts were quoted up slightly, with the 5.25% due 2010 at 52.5 bid and the 6% due 2011 at 51.625 bid. Nextel shares ended up 6c to $2.97.

Nortel's convertibles were quoted off slightly, with the new 7% mandatory at 31.5 bid. The issue is quoted using an abbreviated issue price of 28.75. It sold at $28,751. The 4.5% due 2008 were quoted at 45.625 bid, 48.625 asked. Nortel shares closed off 5c to $1.55.

Aisola said players seem to be watching the tech, telecom and chip sectors, perhaps looking for a time to slowly get back into some of those names.

"Volatility is so cheap right now - the baby has been thrown out with the bath water - that it's a good time to get in position," he said.

"At some point, probably not until the fall, people will begin to start nibbling, that's nibbling, at tech, telecom and some chips. Everything at this point is 'show me.' Even for the arb traders managing bond flow, it's still a stock picking event."

EchoStar has been punished due to the upset in cable caused by Adelphia Communications Inc.'s collapse, and traders said there were some inquiries from potential buyers Tuesday.

The EchoStar converts were quoted off slightly, with the 4.875% due 2007 at 67.375 bid, 69.375 asked and the 5.75% due 2008 at 66.375 bid, 68.375 asked. The shares ended down 27c to $17.10.

Several chip names were sharply lower, however.

Emcore Corp.'s 5% due 2006 lost 1 point to 56.5 bid as the stock dropped $1.01 to $4.66.

Advanced Energy Industries Inc.'s 5.25% due 2006 was quoted down 2.875 points on the day to 79.25 bid, 79.75 asked. The stock closed down $2.81 to $17.25.

Traders said there were several biotech and drug issues higher, but also several that were lower.

Defense names were solidly higher, with Northrop Grumman Corp. leading the way northward.

Northrop's new 7.25% mandatory gained 1.4 points on the day to 129.2 with the stock up 74c to $121.04.

Mandatory convertibles in the mining group were also higher.

But homebuilders were lower, Lennar Corp. the most but also D.R. Horton Inc.

"It seems the thinking is that the housing bubble has definitely burst," said a convertible trader at a hedge fund in New York.

"We are becoming sellers in the group. It looks like the slide has begun, and you don't want to watch all your profits evaporate while you're trying to support holding it. It doesn't matter what's real. It matters what's happening in the market."

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