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Non-Tech : Convertible Bonds
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To: Rocky9 who started this subject7/21/2003 9:17:08 AM
From: Rocky9   of 83
 
From Trimtabs, dated 6/30:

"WHAT WILL DRIVE THE COMING BUST IN CONVERTIBLES.

Wall Street black box types are terrific at wringing the last few basis points out of various hedges – in the past. However, going forward something always happens to upset the applecart – particularly when the trend has become a mania. Convertible hedge funds are the current maniacal investment vehicle.

That's why there's big bucks flowing into new convertible offerings. The premiums on new convertibles are ridiculous and can only exist for as long as the inflow into convertible hedge funds remains big. Only when there's a huge inflow can something called a zero-coupon
convertible exist. Hot money is hot both ways, in and out. After the hot money is "all-in," there will be no support for these ridiculous premiums.

For example, if stock prices drop about 25% going forward and perhaps even more for those stocks underlying the big convertible offering bubble, such as Yahoo, what is a zero coupon that's far out of the money worth? No more than the present value of the put back to the company at maturity. The worst case for the buyers would be when the underlying stock trades at or near the price when the convertible was sold, so that the short hedge is of limited value while the premium shrinks dramatically.

HOW MUCH OF INFLOW INTO CONVERTIBLE HEDGE FUNDS PENSION MONEY?

We can't track hedge fund inflows as of right now. However, our bet is that pension money has been leading the plunge into convertibles. Those in pursuit of mindless returns are bound to get burnt at the edges of cycles."
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