In a November report to clients, Forum Capital Markets, a convertibles research firm in Old Greenwich, Conn., predicted that the Standard & Poor's 500 Stock Index could trade down toward the 440 level in coming weeks.
The prediction was near the mark: The S&P declined 1.79% to 450.09 on Nov. 22.
For 1995, the firm sees another interest rate increase and a fall in the stock market. "We continue to view the domestic economy as expanding, which should cause the Fed to raise rates another 50 to 100 basis points, and peaking by the first quarter. .*.*. Further upside in stocks is limited, while the downside appears to be on the order of 5% to 10% from these levels," the firm said.
Consequently, the firm recommended clients overweight convertibles such as Air Express International, with 6% coupons due 2003; Thermo Electron with 5% coupons due 2001 and for more conservative investors, Consolidated Natural Gas 7.25% bonds puttable in the year 2000 at par.
Its asset allocation model calls for 25% equity equivalent convertibles, which - by Forum's definition - participate in 75% or more of the movement of the underlying common stock and have a conversion premium under 20%; 40% fixed income equivalents, which are higher yielding and tend to move in line with interest rates; and 35% balanced returns, which participate in the majority of the upside of the common stock but limit the downside.
