Rate cut to help Annaly, other financials; E*Trade up on Super Bowl bet; Flextronics up, Yahoo! down on earnings

By Evan Weinberger

New York, Jan. 30 - Wednesday's Federal Reserve rate cut did little for financials immediately, but traders and analysts said convertibles issued by companies like Annaly Mortgage Management Inc. that have a deep exposure to disintegrating subprime mortgages will be helped.

The rest of the financial sector should be helped as well, the analyst said. Bank of America Corp. and Washington Mutual Inc. convertible preferreds were both marginally up.

E*Trade Financial Corp. was up on its executives and directors making major buys of the company's stock and the placement of two commercials during Sunday's Super Bowl.

Flextronics International Ltd. convertibles were up on strong earnings.

Yahoo! Inc. and Hutchinson Technology Inc. convertibles went the other way on weak earnings reports. Yahoo also announced that it would lay off 7% of its workforce.

No new issues priced Wednesday, and no new deals were launched as of press time.

Equity markets rallied briefly on the 50-basis-point cut in the federal funds rate the Fed announced Wednesday afternoon. The cut came a little over a week after a surprise 75 bps cut in the Fed's benchmark interest rate. In their statement announcing the cut, the Fed said there were significant pressures weighing on the economy.

The Fed said that significant "downside risks" hang over the economy in its announcement of the rate cut. "Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the statement said. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

Before the rate cut, word from the Commerce Department that the economy only grew by 0.60% in the fourth quarter of 2007 greeted investors.

Following a rally spread over several days, markets opened lower. And following a brief spike after the announcement of the rate cut, stocks closed lower.

The Dow Jones Industrial Average lost 37.47 points, or 0.30%, to close at 12,442.83.

The Nasdaq slipped 9.06 points, or 0.38%, for a 2,349.00 close.

And the Standard & Poor's 500 slid 6.49 points, or 0.48%, to 1,355.81.

Convertibles trading action remained light, which has been the case in recent days. "I am seeing very little activity here aside from new issue stuff lately," a trader said.

Rate cut reaction mixed

Reaction to Fed chairman Ben Bernanke's action was mixed Wednesday afternoon. "He's rolled over like a puppy dog for the market the entire time," said Mark Henriquez, the director of convertibles trading at J. Giordano Securities. "It's a terrible thing."

Interest rates aren't necessarily the biggest problem facing the economy. The real problem, Henriquez said, is the state of the monoline bond insurers. "It's not a matter of people not lending because of a lack of liquidity," he said. "It's the uncertainty out there that's preventing lending. The biggest uncertainty is all of this insurance with [Ambac Financial Group Inc.] and [MBIA Inc.]"

Others were more positive on the decision. "I think just as a general statement, it's good for stocks in general," a sellside convertibles analyst said. "It's good for anyone running any sort of leverage book."

The analyst said that financials would be helped the most by the recent cuts. He singled out Annaly Mortgage Management and its 6% series B convertible perpetual preferred stock. The Annaly preferreds closed Wednesday at 38.256 versus a closing stock price of $19.80. They closed Tuesday at 37.794 versus a stock price of $19.55.

New York-based Annaly (NYSE: NLY) gained 25 cents, or 1.28%, on the day.

The two agreed that there was a bright future for convertibles.

Big vol event coming

Henriquez said financial institutions were staring down a major "vol event" as the bond insurers come closer to a resolution. He said Ambac and MBIA were hanging over the market like a "black cloud." The most likely solution for the bond insurers, aside from Warren Buffett riding in to save the day with a new institution, will be a reorganization on the fly without Ambac and MBIA filing Chapter 11, and the two coming under new ownership.

But the reorganization is what will lead to the volatility, and investors may be holding on to their convertibles to profit from the ride. "So you still have some vol stuff coming up, and converts are going to be a great place to be all year," Henriquez said.

A trader at a different desk said that the idea made sense to him. He reported limited trading activity, aside from new issues. "The way I see it, the bond insurers have become too large an issue to let them explode; too much after effect," the trader said. "So there will be a solution guided by regulators urging, with some sweet deals made, and life will go on."

Financials up a bit on rate cut

Two relatively new issues from the financial sector that continued their rise were Bank of America's 7.25% non-cumulative perpetual convertible preferred stock, series L, and Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock.

An analyst said those had been doing better recently and saw no reason for them to stop. "I think those have generally been doing well. I don't think that'll change," the analyst said. "Anything in the financial space at all. It's going to be an immediate help, and particularly with banks, with mortgage REITS, with REITs themselves."

Bank of America's convertible preferreds closed Wednesday at 1,094.02 versus a closing stock price of $42.21. They closed Tuesday at 1086.52 versus a stock price of $41.94.

Charlotte, N.C.-based Bank of America stock (NYSE: BAC) picked up 27 cents, or 0.64%, on the day.

Seattle-based Washington Mutual's convertible preferreds closed Wednesday at 1,105 versus a closing stock price of $18.65. They closed Tuesday at 1,083.75 versus a stock price of $18.00.

Washington Mutual stock (NYSE: WM) gained 65 cents, or 3.61%, on the day.

E*Trade up on directors' buying, Super Bowl ad

Executives and directors of struggling online financial institution E*Trade have bought up around $1.9 million shares of the company's stock in recent days, financial disclosures showed Wednesday. That helped investor confidence.

So did news that New York-based E*Trade bought not one but two ad slots for Sunday's Super Bowl.

"I am a fan of E*Trade," a trader said. "I believe the capital they got [from hedge fund Citadel last year] saved the ship, and Citadels' insights will help them get back in gear."

He said the directors' actions are a "big help."

E*Trade's 6.125% common equity units due Nov. 18 closed Wednesday at 7.4 versus a closing stock price of $4.56. They closed Tuesday at 6.86 versus a stock price of $4.14.

E*Trade stock (Nasdaq: ETFC) was up 42 cents, or 10.14%, on the day.

Flextronics up on earnings

Singapore-based electronics manufacturer Flextronics had a good day Wednesday.

Flextronics lost $774 million, or 94 cents per share, in the fourth quarter of 2007 after posting a profit of $119 million, or 20 cents per share, in the same period the previous year.

But the bulk of the losses came as a result of Flextronics' acquisition of Solectron Corp.

With the adjustments made, Flextronics had earnings of $250 million, or 30 cents per share, in the quarter, compared with $136 million, or 23 cents per share, in 2006.

Those numbers beat Wall Street estimates, sending Flextronics stock and convertibles higher.

Flextronics' 1% convertible senior subordinated notes due Aug. 1, 2010 closed Wednesday at 102.025 versus a closing stock price of $11.60. The convertibles closed Tuesday at 98.7875 versus a stock price of $10.31.

Flextronics stock (Nasdaq: FLEX) jumped $1.29, or 12.51%, on the day.

Yahoo slapped by earnings

On Tuesday night, Sunnyvale, Calif.-based internet services provider Yahoo announced downbeat earnings and a layoff of 7% of its staff.

Yahoo announced that its profits for the fourth quarter of 2007 fell to $205.7 million, or 15 cents per share, from $268.7 million, or 19 cents per share, the previous year.

Worse than that, Yahoo's outlook predicted "headwinds" in the year ahead.

The company announced at the same time that it would layoff 1,000 workers.

The chickens came home to roost on Yahoo Wednesday.

Yahoo's zero-coupon convertible senior notes due April 1, 2008 fell to 104.525 versus a closing stock price of $19.05. They closed Tuesday at 108.03 versus a stock price of $20.81.

Yahoo stock (Nasdaq: YHOO) fell $1.76, or 8.46%, on the day.

Hutchinson also disappoints

Hutchinson, Minn.-based disk drive components manufacturer Hutchinson Technology also disappointed investors with its fourth-quarter performance.

The company's profit fell to $2.3 million, or 9 cents per share, for the last three weeks of 2007 after coming in at $5.8 million, or 22 cents per share, in the same period in 2006. That's a 60% drop.

Drop was the operative word for Hutchinson.

The company's 3.25% convertible subordinated notes due Jan. 15, 2026 closed Wednesday at 83.29 versus a closing stock price of $16.18. They closed Tuesday at 92.066 versus a stock price of $24.22.

Hutchinson's 2.25% convertible subordinated notes due March 15, 2010 closed Wednesday at 93.53 versus a stock price of $16.18 after closing Tuesday at 99.02 versus a stock price of $24.22.

Hutchinson Technology stock (Nasdaq: HTCH) fell $8.04, or 33.20%, on the day.

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