Trading patterns signal stocks thought to be heading northward

By Ronda Fears

Nashville, Tenn., June 25 - In another southerly market breeze, traders said there are signs that the market believes stocks have hit a bottom and will be ticking upward.

"In general, it seems the market has a bias toward buying lower premium issues and selling higher premiums," said a convertible trader at a large hedge fund in New York.

That would indicate that convertible holders want to be positioned to participate to a greater degree in stock movements, rather than hold issues with wider premiums in order to cushion stock declines.

A majority of the convertible market, however, is busted. Estimates put busted convertibles upward of 50%.

"Opportunities are a little bit of a mirage right now," the trader continued.

"You get an idea and make a move, that causes a stir and before you know it, the opportunity has evaporated."

Another sign that the market is poised to rebound, the trader said, is a slight uptick in volatility.

"The volatility tells you that the market is due for a pretty good rally, but it's looked like that for weeks now," said a convertible trader at a hedge fund in New Jersey.

"I would be scared to buy volatility right now, but everybody who's been selling [volatility] has gotten burned."

Indeed, most market pundits say it is dangerous to head into the summer long volatility as it is typically a time when the stock market is in a lull.

Flow was moderately heavy, dealers said, but there was no solid direction in terms of sectors.

"There wasn't really a clear exodus going on or a flight to quality, but there seemed to be a strong tendency toward groups like manufacturing and leisure, since it's summer," said a convertible trader at a major investment bank.

Host Marriott's 6.75% convertible preferred added 0.25 point to 40 bid, 40.5 asked with the stock up 10c to $11.55.

In addition to all the usual suspects declining in tech and telecom - Lucent, Nortel, WorldCom, Sprint PCS, Emulex, Novellus, Agilent - transportation, defense and energy names were sharply lower.

"Just about everything was lower, my entire screen is red" one dealer said.

Market watchers had been thinking that defense issues would be rallying as President Bush is pushing for higher defense spending, but the defense bill was stalled Tuesday in the U.S. Senate.

Defense names like Northrop Grumman, Raytheon and L-3 Communications were lower, however, for a variety of reasons, traders said.

L-3 sold $750 million of 10-year senior subordinated straight debt at par to yield 7.625%, or 279 basis points over Treasuries, after selling $768 million of stock on Monday.

The L-3 issues were positive for the convertibles, as S&P upgraded the two issues on Tuesday to BB- from B+.

"The spreads on L-3 tightened quiet a bit, by something like 100 or more basis points, because of the straight bond deal," said a trader.

"There was a huge sell-off in the stock, though."

The L-3 convertibles, with premiums of 10% to 20%, declined in line with the common, which fell $2.09 to $54.51. The 5.25% due 2009 was quoted down 4.75 points to 148 bid, 148.5 asked and the 4% due 2011 down 3 to 120.75 bid, 121.25 asked.

Northrop and Raytheon went south as Northrop turned up the heat in the bidding war for TRW Inc.

Northrop raised its offer from $6.7 billion to about $7.2 billion, according to reports, competing with offers made by BAE Systems plc, General Dynamics and Raytheon.

Northrop shares fell $4.35 to $124 and the mandatory convertible dropped 3.63 points to 131.12.

Raytheon stock lost $2.37 to $38.58, and the mandatory convertible plunged 3.13 to 64.42.

Homebulders also were notably lower on heightened fears that the housing construction bubble will burst soon, dealers said.

"Everyone has been nervous about these names for a while, and it seems like there are some people thinking summer is a natural time for that business to slow down, so they are getting out now while the getting is good," said a convertible trader at a hedge fund based in California.

Lennar's 0% due 2018 was down 1.5 points to 76.5 bid, 77 asked as the stock lost $1.47 to $58.53.

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