U.S. Stocks Post Biggest Weekly Rally Since April on Oil Slump

By Lynn Thomasson

Aug. 9 (Bloomberg) -- U.S. stocks rose, sending the Standard & Poor's 500 Index to the largest weekly rally since April, as retailers, automakers and restaurants climbed on speculation earnings will improve as oil retreats.

J.C. Penney Co., Ford Motor Co. and Macy's Inc. led S&P 500 consumer companies reliant on discretionary spending to the biggest gain since March 2003 after oil sank to a three-month low of $115 a barrel. McDonald's Corp. had the steepest advance in 11 months on July sales that topped analyst forecasts. Worse-than- estimated losses at Fannie Mae and Freddie Mac forced both companies to slash dividends, dragging their shares to losses exceeding 23 percent.

``U.S. stocks are applauding the sharp pullback in commodity prices,'' said Robert Stimpson, a fund manager for Akron, Ohio- based Oak Associates Ltd., which oversees $1.2 billion. ``It means lower inflationary pressures and basically gives a tax cut to the consumer.''

The S&P 500 added 2.9 percent to 1,296.32, the highest since June 25. The Dow Jones Industrial Average increased 3.6 percent to 11,734.32. The yield on 10-year Treasuries remained at 3.93 percent after the Federal Reserve kept its interest-rate benchmark at 2 percent.

After falling to a 2 1/2-year low on July 15, the S&P 500 rebounded 6.7 percent. It's still down 12 percent this year as record fuel costs and bank losses stemming from the U.S. mortgage crisis prompted analysts to lower profit estimates.

Dollar Gains, Oil Drops

The steepest weekly rally by the U.S. Dollar Index since January 2005 and speculation slowing economic growth will lessen demand for raw materials pushed oil to its fourth drop in five weeks. Crude lost a fifth of its value in the past month. Among 10 industries, only energy and material producers fell this week.

The Federal Open Market Committee voted to leave its target rate for overnight lending between banks unchanged and indicated it's not likely to raise it until credit losses subside. Recent declines in raw material prices may support the Fed's prediction for inflation to ease through next year. The statement, released Aug. 5, drove stocks to the biggest daily gain in four months.

J.C. Penney, the third-largest U.S. department-store chain, climbed 18 percent to $35.75. Macy's, the second-biggest, rose 14 percent to $20.73. Ford, the No. 2 U.S. automaker, added 13 percent to $5.26.

McDonald's surged 9.9 percent to $65.67. Global sales by restaurants open at least 13 months advanced 8 percent, the biggest gain since February, after the restaurant chain sold more chicken biscuits and $1 sweet tea in the U.S. and snack-sized chicken wraps in France.

`Stimulus Check'

``A decline in gas prices is the equivalent of a stimulus check going out to the average American,'' said Dan Veru, who helps manage $2.8 billion at Palisade Capital Management in Fort Lee, New Jersey. ``It can help retailers, and the customer might have a little more discretionary money to put to work.''

The Reuters/Jefferies CRB Index of 19 raw materials reached a four-month low as copper, crude oil and silver tumbled.

Massey Energy Co., the largest U.S. producer of coal from the Appalachian region, fell the most among energy producers in the S&P 500. The stock dropped every day this week, losing 22 percent to $59.03.

Exxon Mobil Corp., the world's biggest oil producer, slipped 1.3 percent to $78.72. Schlumberger Ltd., the largest oilfield- services provider, retreated 7.9 percent to $92.28.

Fannie, Freddie Drop

Fannie Mae sank 23 percent to $9.05. Before a one-time gain, Fannie Mae's loss was $2.51 a share, compared with the 72-cent average estimate of 10 analysts in a Bloomberg survey. The common-stock dividend will be cut to 5 cents from 35 cents a share.

Freddie Mac slashed its dividend at least 80 percent after posting a quarterly loss that was three times bigger than analysts' estimates. The company doubled reserves for future home-loan losses to $2.8 billion. Freddie Mac shares plunged 26 percent to $5.90.

Still, financials in the S&P 500 rose 1 percent this week.

MBIA Inc., the biggest bond insurer, posted a profit that beat analyst estimates and said it would resume a share buyback. The company also decided against taking additional reserves for mortgage-related guarantees. MBIA shares had the first back-to- back weekly gains since February, climbing 12 percent to $8.57.

KeyCorp added 8.8 percent to $11.94. Merrill Lynch & Co. upgraded Ohio's third-biggest bank to ``buy'' from ``underperform,'' calling it inexpensive relative to its peers.

Technology Stocks Climb

Cisco Systems Inc. had the biggest weekly gain since November 2006, adding 10 percent to $24.25. The biggest maker of networking equipment reported fourth-quarter profit that topped analysts' estimates by a penny. Revenue surpassed $10 billion for the first time, and sales this quarter and next will be in line with projections, the company said.

Technology stocks in the S&P 500 climbed 6 percent, the second-steepest advance among 10 industries.

Procter & Gamble Co., the largest consumer-products company, rose the most in six years after posting fourth-quarter profit that topped the average analyst estimate. The company said earnings may increase further as it boosts prices to counter higher oil and paper costs.

Only 19 S&P 500 companies are scheduled to report quarterly results next week, down from at least 74 this week. They include Wal-Mart Stores Inc. and Macy's. Earnings at companies in the S&P 500 will advance 2.3 percent this year, according to analyst estimates compiled by Bloomberg. That compares with forecasts for a 15 percent increase at the end of last year.

Economists predict U.S. retailers will say sales dropped in July for the first time in five months as record gasoline prices siphoned the cash from tax rebates out of consumers' pockets. Purchases fell 0.1 percent after a 0.1 percent gain in June, according to the median estimate in a Bloomberg News survey before the Commerce Department's Aug. 13 report.

Other reports may show food and fuel prices pushed up the cost of living and manufacturing stagnated.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.