Investors still wary of taking plunge into high-yield market

By Paul A. Harris

St. Louis, Mo., Sept 28--As October wound down, the sell-side of the primary high yield market seemed to be sticking its toes into a pool of water that they found way too cold for the plunge. The buy-side, meanwhile, stood well off, as though nothing but a very convincing swan dive, by those sell-siders, would bring them near the pool.

The key to a return to more normal conditions is an end to mutual fund liquidations, investors said, something they say is dependent on the stock market showing signs of a more positive tone.

Prescott Crocker, portfolio manager of the $399.9 million Evergreen High Yield Fund, told Prospect News Friday that mutual fund liquidations are a major factor that is creating considerable uncertainty for buysiders.

Pointing out that withdrawals from funds in September amounted to $1.346 billion, Crocker said: "As I understand it, most of the high-yield funds are sitting on 8%, 8 ½% cash, on average.

"You've got stop the fear of liquidations," Crocker asserted. "What's going to stop the liquidations, I think, is another week of rising stock markets - something out there that causes people to feel better about investing, and feel a degree of confidence.

"You saw a bottom in the stock market last Friday (Sept.21), with volume at two-and-a-half times normal volumes," he said. "You saw capitulation sell-down. I think that bottom will be re-tested, and successfully re-tested.

"Is it the start of a long-term bull market?" Crocker asked. "I tend to doubt it. I think stocks will tend to go back up to something in the area of 1200, on the S&P."

As to the high yield market, itself, Crocker said: "There's no question in my mind that as soon as high yields start flowing positively you'll see the bids rally. And the only way you'll be able to get back in the market is on new issues.

"You can get back in the market, right now, on issues that people are trying to sell for credit reasons," he said, "but you don't want to buy them.

"You can get back in the market right now on certain issues that people may be selling for liquidity," he continued, conjecturing that Nextel might serve as an example of such an issue.

"There isn't really that deep a market in Nextel," Crocker said. "I think the reason why Nextel came off with such a slam-bang, in the last two days, was the realization that Craig McCaw was having massive calls on leverage. So the Street brought the bond off, as the stock came off. And then I noticed the stock recovered today."

Louise Rieke, portfolio manager of the Waddell & Reed High Yield Fund, also believes the stock market is the key to a recovery in high yield.

"That's critical," she insisted. "That's where the high yield market takes its cue.

Rieke suggested that a positive synergy, in the markets, is vital to the health of high yields.

"Every morning high yield looks at futures, they take a look at what's happening in Europe," she said. "If it's bad news, the market opens down."

As to the current state of the market, she's particularly concerned about travel and lodging but fears the problems could be broader.

Travel and lodging suffered in the wake of the Sept. 11 terrorist attacks on New York and Washington D.C. and Rieke said that she and her colleagues are keeping a close eye on other sectors that might suffer in the wake of that cataclysm.

"We're just going through stuff in our portfolio to see who's going to be impacted there," she said.

"We're watching hotels and gaming, just like everybody else," Rieke commented. "But it's the things you're not going to expect: what tiny little thing is going to pop up and surprise you?"

For the first time in many Americans' lives, Rieke said, concerns about "personal safety" seem to be exerting an inhibiting force on the consumers.

"They would rather save, not knowing what tomorrow's going to bring," she said.

End

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