Players remain on the sidelines as stocks continue sharp slide

By Ronda Fears

Nashville, Tenn., July 22 - As another downdraft hit stocks, convertibles were quiet amid very thin trading as WorldCom's bankruptcy became reality.

"Most people are just sitting around waiting, I don't know for what. I'm just not willing to risk capital right now," said John Seibel, head of trading at Silverado Capital Management.

"We had a lot of good years, and now we're in the lean years. This could go on for the rest of the decade."

There were lots of sellers, for "everything, including the kitchen sink," as one trader put it, but there also were a few buyers in the market Monday.

Lifepoint Hospitals was in the very short list of issues getting bids as the stock declined ahead of its earnings report after the close, which came in above expectations.

But many companies were beaten up even though they beat expectations of their earnings, like Quest Diagnostics.

WorldCom's news, while not unexpected, rattled investors and telecoms were decimated.

In addition to the WorldCom bankruptcy, BellSouth reported disappointing results and revised its outlook downward. And, Sprint PCS was feeling pressure from the need for a new credit facility.

"Telecoms are just hemorrhaging, from several gaping wounds," said a dealer.

"The misses are adding up faster and faster. We just can't find any good news in that group."

Pain was fairly evenly distributed, however, and certainly not limited to the telecoms.

Last week, the U.S. stock market fell 5.2% on an equal-weighted geometric basis, noted Salomon Smith Barney convertible analyst Adrian Miller.

The average stock traded on Nasdaq performed far better than its average counterpart in the NYSE-listed universe. The average NYSE listing tumbled 7.3% last week, while the average Nasdaq stock fell 4.6% over the same period. The capitalization-weighted Nasdaq composite outperformed the average component last week, falling 4.0%. The average constituent of the S&P 500 suffered a loss of 8.4%, slightly weaker than the 8.0% plunge in the cap-weighted S&P 500.

The average stock in the convertible universe fell 6.0%, on an equal-weighted geometric basis. The capitalization-weighted calculation was slightly better at a 5.6% drop. On a simple arithmetic basis, stocks in the convertible universe fell 5.6%.

"As one can tell, the close proximity between the calculation methods [shows] the precipitous fall was wide spread," Miller said.

Players have been talking about running for cover in Treasuries, or holding cash, where possible.

Across capitalization tiers, Miller said the large cap group was off the most, on a geometric basis, falling 6.6%. That compares to the mid- and small-cap groups, which lost 6.7% and 6.2%, respectively.

On a market cap-weighted basis, it was the mid-cap group suffering the largest setback, falling 6.1%. The large- and small-cap groups were off 5.4% and 5.5%, respectively.

"Across industry groups, the worst performing group may well have been the capital goods sector," Miller said.

While capital goods have been a safe haven in times past, he said the sharp drop last week was mostly due to defense industry exposure, "which took it on the chin from Raytheon and Northrop."

For the week, the capital goods group lost 9.7% on a geometric basis and 10.5% on a cap-weighted method.

"Probably the best performing group during last week's collapse was the healthcare sector," Miller said, if you strip out the biotechs.

While the healthcare group's weighted average return was down by 8.9%, he said this was due to the dramatic decline of the biotech group which saw blow-ups in names like Johnson & Johnson and Novartis. On a geometric basis healthcare was actually up 0.06% without biotechs, he said.

Still, no matter how you look at it, many players lament that there was nowhere to hide in this market.

In addition to the pain in telecom, energy and power names were hit hard again Monday by news from Williams Cos. Inc.

Williams said it expects loss for the quarter and slashed its common dividend by 95% to conserve cash.

Fitch cut Williams to junk, downgrading the senior debt to BB+ from BBB, noting the company said it is in negotiations for new bank financing to replace its existing unsecured $2.2 billion revolver and a $700 million three-year bank line that matures in July 2005.

El Paso Corp. was a small exception to the declines in the energy and power group seen by Mirant, Calpine, CMS and Duke Energy.

El Paso said it completed the removal of ratings triggers on $1 billion of financing, part of a plan by the power and gas company to strengthen its balance sheet.

The market was also watching Monday for news on the Masco Corp. and Solectron Corp. puts.

Solectron's modified dutch auction tender offer got more than the $1.5 billion tendered for, $1.9 billion the company said on a preliminary basis, and the company said it will pay the high end of the range, 60. Final figures are expected Wednesday.

The deadline for the put on Masco's 0% convertible due 2031 was Monday, so there was no news available.

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