While the large-cap stock measures are securely in correction mode, with many talking heads forecasting significantly worse things to come, the smaller measures more representative of our convertible world are well into bear territory. This morning, even as the big indices try to push forward, the Russell 2000 is losing ground as we write. None of the charts we see give much assurance that we won’t experience further declines of 5-10% from here. Not catastrophic, but very, very painful.

Then again, opportunities seem to be peeking their heads through in a lot of places. It’s not hard to find companies with appealingly small market capitalizations—a billion here, two billion there—trading at discounts to their growth rates. Ah, you say, but growth is slowing. Yes, in many places, it is. And one sharp young mind I know is convinced the emerging markets can drag America into recession.

What comes next is not obvious to me. But what does seem clear is that prices are starting to reflect real opportunities. There should be opportunities for those with opinions proving correct to put up some good performance, both in absolute and relative terms. And a lot of these opportunities are going to come in smaller names, almost by definition.

The shame, for now, is that the dramatic pullback in small-cap valuations augurs poorly for new convertible issuance. Not good news for those of us whose livelihoods depend on that issuance—and to one extent or another, that’s most of us. On the other hand, as we see in this week’s HOCS report, we’re getting a sort of second chance to buy paper on appealing terms—and not just in small names.

While there’s breath, there’s hope.

Roman Terekhin remains on an extended client assignment.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).