Miscellaneous scraps of convertible paper trading; action to heat up next week

By Ronda Fears

Nashville, Aug. 28 - Traders who were not on vacation - many desks were slimmer Thursday and expected to trim down even more Friday, as another wave of convertible pros take off work ahead of the three-day weekend - said they were managing to stay busy as "miscellaneous" convertibles were active.

With trading so thin, it was virtually impossible for traders or fund managers to comment on market trends or broad-based movements in the overall market, or even specific convertible issues, for that matter.

"The closest thing to a theme that seems to be going on this week is that a lot of managers, at least of the ones who are actually in the office this week, are poring over their portfolios, checking on what they have, what they want to pitch or thinking about what they'd like to pick up," said a convertible analyst at a huge hedge fund in New York.

Amidst a bad case of boredom, many players and market watchers are looking forward to getting busy next week - in the trading trenches as well as in the primary market.

"I think we'll probably be busy next week," said Brendan Lynch, convertible analyst at Lehman Brothers.

"Everyone will be in the back-to-work mode."

Capital markets sources say issuance will pick up after Labor Day, most vigorously toward the middle of September.

"We expect a handful of deals next week with the market picking up gradually into the third and fourth week of September," said a salesman at a sellside shop.

"Most firms [are] waiting until September to approach the market."

As for trading action Thursday, traders said there were several telecom and telecom equipment issues gaining ground - including the new Western Wireless and ADC Telecom converts. But the new UTStarcom issue dropped sharply.

LTX Corp. got a nice pop on its earnings, one trader mentioned, and peer chip names like Advanced Micro Devices, Vishay and Photronics followed suit.

Healthcare and biotechs were widely mixed, too, but there were some sharp moves along with the stock. Teva Pharmaceuticals and Gilead Sciences were both higher while Nektar Therapeutics and Sierra Health lost ground.

For those watching other credit markets and Treasuries for some inclination as to how they should move forward, Banc of America Securities chief credit strategist Jeffrey Rosenberg suggests cyclical sectors and lower credit quality paper.

In general, Rosenberg paints a picture of a very tumultuous and dangerous time for credit strategists in his weekly report, suggesting that, if not careful, credit players could end up on their back like Charlie Brown, after being lured into play by Lucy.

"I give you my bonded word." (Sept. 21, 1958)

"You have to learn to be trusting..." (Oct. 4, 1959)

"The odds now are really in your favor!!" (Oct. 16, 1960)

"These are just some of the reasons (and dates of original publication) why Chuck landed on his back. When Lucy plays the unreliable placeholder for Charlie Brown, "AAUGH!" is inevitably the sound of his frustration," Rosenberg said in the report.

"Just one word of positive news from the Fed could flatten the Treasury curve dramatically and leave market participants on their backs as the value of the carry trade disappears and swap and high quality corporate spreads widen.

What's bad news for rates, the curve and swap spreads is good news for credit risk, he said.

"High quality credit spread widening to Treasuries is an interest rate risk phenomenon, not credit risk. Credit risk continues to fall, albeit only modestly, as equity volatility falls to the high teens," Rosenberg said.

"When high quality spreads are vulnerable to swap spread widening and credit risk is declining, lower quality exposure becomes a defensive play. As a result, we continue to view cyclically exposed sectors and lower credit quality issuers as the place to overweight credit exposure."

Convertible players might be interested in knowing that Banc of America high yield credit analysts suggested the best investment ideas for September included convertible issuers AES Corp., Allied Waste North America, Charter Communications, D.R. Horton and Dynegy.

Also, high grade bond recommendations currently on the Banc of America list include Northrop Grumman, Ford, General Motors, Universal Health, Wells Fargo, Vodafone, International Paper, Masco, Keyspan, Xcel Energy, Hartford, General Mills, Hilton Hotels, Apogent, Quest Diagnostics, Prudential, News Corp., Deutsche Telekom, American Electric Power and several other convertible names.

Rosenberg said there's less risk of flattening in 10- to 30-year bonds, so he would steer away from the belly of the curve.

"With the risk that market expectations for Fed tightening will shift forward, the curve flattens from the short end. In this case, the longer portion of the Treasury curve may not flatten as aggressively," he said.

"The combination of rising short rates causing a steepening in the credit spread curve from 2 years to 10 years, and a still attractive spread curve from 10 to 30 years, yields a strategy of underweighting the belly of the curve in favor of the wings."

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