U.S. Stocks Rally on U.S. Steel Earnings, Decrease in Oil Price

By Eric Martin

July 29 (Bloomberg) -- U.S. stocks rallied, erasing yesterday's tumble, sparked by the biggest advance in U.S. Steel Corp. in seven years and falling oil prices.

U.S. Steel climbed 14 percent, sending steelmakers to their best gain since 2002, after net income more than doubled on higher prices. McDonald's Corp. and General Motors Corp. jumped as crude slid almost $3 a barrel. Financial shares rose for the first time in four days, led by Bank of America Corp. and JPMorgan Chase & Co., as Merrill Lynch & Co.'s plans to sell $8.5 billion of stock and liquidate $30.6 billion of bonds bolstered speculation that Wall Street is overcoming failed subprime bets.

The Standard & Poor's 500 Index added 28.83, or 2.3 percent, to 1,263.2, rebounding from a 1.9 percent slump yesterday. The Dow Jones Industrial Average gained 266.48, or 2.4 percent, to 11,397.56 after a 2.1 percent tumble yesterday. The Nasdaq Composite Index increased 55.4 to 2,319.62. More than four stocks rose for each that fell on the New York Stock Exchange.

``Oil is clearly pushing the market higher,'' said Eric Green, Cherry Hill, New Jersey-based director of research and senior money manager at Penn Capital Management, which oversees about $4.5 billion. ``You had intense fear that things were bad and getting worse. The direction of oil changing was a significant catalyst for this market.''

Earnings have topped estimates at three-quarters of the 255 companies in the S&P 500 that have reported second-quarter results so far, according to Bloomberg data. Profits have slumped 23 percent on average for the group as earnings decreased 90 percent for financial firms and 33 percent for companies that rely on discretionary consumer spending. Each of the other eight industry groups in the S&P 500 have reported higher income.

Consumer Confidence

Benchmark indexes extended gains after consumer confidence recovered in July from a 16-year low, sending the Conference Board's index to a higher-than-forecast reading of 51.9.

U.S. Steel, the second-largest U.S.-based steelmaker by market value, gained $20.43 to $165.76. Excluding certain items, per-share profit was $5.67 in the second quarter, topping the $3.82 average estimate of 14 analysts in a Bloomberg survey.

AK Steel Holding Corp., the fourth-largest U.S.-based steelmaker, climbed $7.05, or 14 percent, to $57.37. The S&P 500 Steel Index jumped 9 percent, its steepest advance since October 2002.

Banks rallied after Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage- related bonds that have caused most of the firm's losses -- for $6.7 billion. The sale will result in a third-quarter pretax writedown of $4.4 billion, Merrill said.

Merrill shares are trading closer to ``fair value'' after slumping 12 percent yesterday, Oppenheimer & Co. analyst Meredith Whitney wrote in a note to clients.

`Applaud This Purging'

``We applaud this purging of assets as an attempt to cut its losses and focus on stabilizing its platform and righting the franchise toward growth,'' Whitney wrote. While the stock ``still sells at a premium to book value and is expensive in our opinion, we believe the stock is getting closer to fairly valued levels as now the hardest work is behind the company.''

Whitney increased her 2008 loss estimate for Merrill to $10.50 a share from $8.37 and maintained her ``underperform'' rating on the stock.

Merrill added $1.92, or 7.9 percent, to $26.25 after pricing the new shares at $22.50 each.

A measure of financial stocks in the S&P 500 increased 7.5 percent, its biggest rally in almost two weeks. Lehman Brothers Holdings Inc. gained $1.61, or 11 percent, to $16.88. Bank of America increased $4.16, or 15 percent, to $32.22. JPMorgan gained $3.09, or 8.2 percent, to $40.75.

Bond Insurers Jump

Bond insurers rallied after Security Capital Assurance Ltd. agreed to pay Merrill $500 million in cash to cancel $3.7 billion of contracts guaranteeing the repayment of collateralized debt obligations backed by subprime mortgages.

MBIA Inc., the largest bond guarantor, jumped 15 percent to $4.92. MGIC Investment Corp., the biggest U.S. mortgage insurer, rallied 22 percent to $6.08.

The drop in crude sent the S&P 500 Retailing Index up 4 percent as all 29 companies in the group advanced, led by Dillard's Inc. The Amex Airlines Index rallied 11 percent.

General Motors climbed 90 cents, or 8.2 percent, to $11.90 and McDonald's added $1.91 to $59.70. AMR Corp., parent of American Airlines, jumped $1.48, or 19 percent, to $9.48.

Oil's Slide

Crude for September delivery slid $2.54, or 2 percent, to $122.19 today in New York. Oil has dropped 17 percent since its July record as the rising dollar curbed the appeal of commodities as an inflation hedge. A report tomorrow may show that gasoline supplies rose for a fifth week, according to analysts surveyed by Bloomberg.

Energy companies posted the only decline among 10 industries in the S&P 500, losing 0.8 percent as a group. ConocoPhillips, the third largest, dropped $1.51, or 1.9 percent, to $80.27.

Amgen Inc., the largest biotechnology company, rallied $1.80 to $62.28. The company said second-quarter net income fell 7.7 percent to $941 million as sales of the anemia medicines Aranesp and Epogen declined. Profit excluding certain costs was $1.14 a share, exceeding the $1.03 average estimate of 19 analysts surveyed by Bloomberg.

Colgate-Palmolive Co. gained after the world's biggest toothpaste maker said second-quarter profit rose, topping analysts' estimates, on an increase in prices and higher sales in Latin America and Asia. Excluding one-time costs, earnings beat the average estimate of analysts by 4 cents a share. The shares jumped $5.59, or 8.2 percent, to $74.15.

Housing Slump

Stocks gained even after a private report said home prices in 20 U.S. metropolitan areas fell at a faster pace in May, indicating the three-year housing slump hasn't stabilized. The S&P/Case-Shiller home-price index dropped 15.8 percent from a year earlier, the biggest decline since records began in 2001, after decreasing 15.2 percent in April. The gauge has fallen every month since January 2007.

The S&P 500 has declined 19 percent from an October record as the collapse of the U.S. subprime mortgage market forced financial institutions worldwide to report $473 billion in writedowns and credit losses since the beginning of 2007. That prompted economists to forecast 1.5 percent growth in the U.S. economy in 2008, the slowest since 2001. Equities also suffered as inflation increased, giving the U.S. consumer price index the steepest gain since 1991.

Indexes of all 10 industry groups in the S&P 500 have fallen this year, led by a 27 percent tumble in financial shares. Commodities producers have fared the best, dropping just 5.1 percent.

``Financials have underperformed significantly this year, yet we still have them in our portfolio with the anticipation that things will improve,'' Michael Koskuba, who helps oversee $62 billion as a portfolio manager at Victory Capital Management, said in an interview on Bloomberg Television.

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.