U.S. Stocks Rally Most in Four Years, Led by Financial Shares
By Michael Patterson
The Land Rover factory
Aug. 6 (Bloomberg) -- U.S. stocks rallied the most in four years, led by
financial companies, on speculation the government will take steps to limit
losses in mortgage lending.
Citigroup Inc., American International Group Inc. and Bank of America corp.
helped the Standard & Poor's 500 Index and Dow Jones Industrial Average rebound
from three weeks of declines. Wells Fargo & Co. posted its biggest climb in
five years after saying it will buy back $1.7 billion in shares. U.S. stocks
recouped $363 billion of the $1.6 trillion wiped out since July 13.
Fannie Mae had its biggest gain in 20 years and Freddie Mac advanced the most
since 2000 on expectations regulators will loosen restrictions on how much they
can spend on home loans. Procter & Gamble Co. led a gauge of consumer shares to
its biggest increase in five years after falling oil prices bolstered prospects
for Americans to spend more.
The S&P 500 rose 34.61, or 2.4 percent, to 1467.67. The Dow rallied 286.87,
or 2.2 percent, to 13,468.78. The Nasdaq Composite Index added 36.08, or 1.4
percent, to 2547.33.
``A lot of people were on the sidelines waiting to buy these financial
stocks,'' said Keith Wirtz, who helps oversee $23 billion as chief investment
officer at Fifth Third Asset Management in Cincinnati. ``The news today from
Fannie and Freddie was substantial enough to give people the courage to step
back in.''
The yield on 10-year Treasury notes climbed more than 0.06 percentage point
to 4.74 percent. The dollar rose versus the yen.
Fannie Mae, Freddie Mac
Fannie Mae added $5.87, or 10 percent, to $62.50 for its steepest advance
since October 1987. The largest U.S. home loan company asked its regulator to
raise the maximum amount of home mortgages it can hold to provide more
liquidity to the market, a person with knowledge of the request said. A
spokesmanfor Fannie Mae declined to comment. Freddie Mac climbed $4.30, or 7.7
percent, to $60 for its best gain since October 2000.
The Federal Reserve's rate-setting Federal Open Market Committee is expected
to release its decision on interest rates tomorrow. Policy makers will keep
rates steady at 5.25 percent, according to all 96 economists surveyed by
Bloomberg News.
Fed Watch
Some investors and economists said the Fed may suggest after their meeting
that the risks to economic growth have increased following the rout in stock
and credit markets since mid-July.
``It would be appropriate for the Fed to refer to the current turmoil in the
markets,'' said John Carey, who helps manage $14 billion at Pioneer Investment
Management in Boston. ``I would hope that whatever they say is calming.''
Merrill Lynch & Co. today pushed up its forecast for the Federal Reserve to
cut interest rates to October as the turmoil in the credit markets and falling
home prices slow U.S. economic growth.
The central bank will reduce the target rate to overnight loans between banks
by a quarter percentage point to 5 percent, Merrill chief economist David
Rosenberg said in a report.
A gauge of financial firms in the S&P 500 has tumbled 8.6 percent this year,
the worst performance among 10 industry groups, as losses spread from
investments tied to subprime mortgages. The index climbed 4.7 percent today for
its best gain since October 15, 2002.
Citigroup, the largest U.S. bank, added $2.63 to $48.35 for the top gain in
the Dow average. AIG, the biggest insurance company, gained $2.92 to $64.56.
Wells Fargo rose $1.95, or 5.9 percent, to $34.76, the best advance since
July 2002. The second-largest U.S. home lender said its board today authorized
the repurchase of up to about 1.5 percent of the company's outstanding shares.
Merrill Lynch
Merrill added $4.50, or 6.4 percent, to $74.55. UBS raised its recommendation
for the stock to ``buy'' from ``neutral'' and said any possible losses in
Merrill's credit business have already been priced into the stock.
``While the headwinds in the industry are real and can stick around for a
while, we think buying the stock at this time makes sense,'' New York-based
analysts including Glen Schorr wrote in a note to clients. Losses from mortgage
and credit businesses and ``potential follow-on effects across the industry are
now (mostly) discounted in the company's valuation.'' The stock has lost 20
percent this year and trades for 8.5 times expected earnings.
Other brokerages also rallied. Goldman Sachs Group Inc., the biggest
securities firm by market value, added $8.11 to $187.79. Lehman Brothers
Holdings Inc., the largest U.S. underwriter of mortgage bonds, increased $2.49
to $58.27.
`Good Values Created'
``Anything that has to do with housing or mortgages, any stocks that have
mortgages in their names, have been knocked down, and some of them have much
lower-risk profiles than other companies that deserve to get knocked down,''
said Raymond Anello, who helps manage $16 billion at RS Investments in San
Francisco. ``There have been some good values created.''
A gauge of stock-market volatility dropped after reaching a four-year high on
Aug. 3. The Chicago Board Options Exchange Volatility Index fell 8.8 percent to
22.94. Lower readings in the so-called VIX, derived from prices paid for S&P
500 options, indicate traders expect smaller price swings in the next 30 days.
Oil prices fell the most in seven months in New York on concern the U.S.
economy will slow, reducing demand at a time of rising supplies. Crude for
September delivery declined $3.42 to $72.06 a barrel.
The drop in energy costs helped boost makers of consumer products and
retailers such as Procter & Gamble Co. and Wal-Mart Stores Inc.
P&G, UnitedHealth
P&G, the largest U.S. consumer-goods company, added $2.12 to $65. Wal-Mart,
the world's biggest retailer, gained $1.50 to $47.02. A gauge of
consumer-related companies in the S&P 500 climbed 3 percent.
UnitedHealth Group Inc. climbed $1 to $48.50. The largest U.S. health insurer
said second-quarter earnings were 89 cents a share instead of the 87 cents
reported July 19, after an increase in government payments for last year.
Earnings for the year will be 2 cents higher than projected last month, or
$3.45 to $3.50 a share, after expenses for stock options.
A gauge of health-care stocks in the S&P 500 climbed 2.3 percent as a group.
Aetna Inc., the third-largest U.S. health insurer, added 67 cents to $49.98.
Cigna Corp., a Philadelphia-based health insurer, increased 93 cents to $48.80.
Intuit, Cooper Tire
Intuit Inc. added $2.16 to $30.26. Merrill Lynch raised its rating on the
maker of Quicken personal-finance software to ``neutral'' from ``sell,'' saying
the stock will probably rise through the end of the year.
Cooper Tire & Rubber Co. climbed $1.07 to $22.25 after the second-largest
U.S. tiremaker posted profit of 28 cents a share in the second quarter, topping
the 23-cent average analyst estimate compiled by Bloomberg. Sales rose 20
percent to $751 million.
Stocks also got a boost after Credit Suisse Group's equity strategists, who
have been bearish on U.S. stocks since 2000, recommended investors increase
holdings in the world's biggest economy. Investors should have 46.8 percent of
their global equity holdings in U.S. shares, a Credit Suisse team led by Andrew
Garthwaite wrote in a report to clients today. That's up from a previous
recommended allocation of 36.8 percent.
``The U.S. has what we view as the best macro and micro policy response to
slowing growth,'' the strategists wrote.
More than two stocks gained for every one that fell on the New York Stock
Exchange. Some 2.3 billion shares changed hands on the Big Board, 39 percent
more than the three-month daily average.
The Russell 2000 Index, a benchmark for companies with a median market value
of $695 million, gained 1.5 percent to 766.39. The Dow Jones Wilshire 5000
Index, the broadest measure of U.S. shares, climbed 2 percent to 14,723.12.
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