By Elizabeth Stanton
Sept. 8 (Bloomberg) -- U.S. stocks climbed the most in a month, adding to a rally across Europe and Asia, as the government takeover of Fannie Mae and Freddie Mac improved the outlook for a financial system battered by $507 billion in credit losses.
Citigroup Inc., Wachovia Corp. and American International Group Inc. added more than 9 percent in New York trading after Treasury Secretary Henry Paulson said the government will provide short-term funding to mortgage lenders Fannie and Freddie. Pulte Homes Inc. and Lennar Corp. jumped more than 12 percent, leading homebuilders to a four-month high. A rally in banks from Germany to Japan sent the MSCI World Index up the most since March.
The takeover ``goes a long way toward addressing the number one negative, the downward spiral in housing prices,'' said Henry Herrmann, president and chief executive officer of Waddell & Reed Financial Inc., which manages $70 billion. ``If the market ended the day lower I'd be stunned.''
The Standard & Poor's 500 Index gained 24.71 points, or 2 percent, to 1,267.02 at 10:06 a.m. in New York. The Dow Jones Industrial Average rose 251.02, or 2.2 percent, to 11,471.98. The Nasdaq Composite Index advanced 20.49, or 0.9 percent, to 2,276.37. About seven stocks climbed for each that fell on the New York Stock Exchange.
All 24 industry groups in the S&P 500 advanced as higher commodity prices boosted energy and mining companies. Treasuries fell, pushing 10-year note yields up by the most since July, as investors sought higher-yielding assets. The dollar advanced against the euro for an eight day.
Financial Rally
Citigroup climbed $1.77 to $20.84, while AIG added $2.03 to $24.37 and Wachovia jumped $1.85 to $18.60. JPMorgan Chase & Co., the third-biggest U.S. bank, increased 8.5 percent to $42.96.
The S&P 500 Financials Index climbed 6 percent, its biggest gain since July.
The Federal Housing Finance Agency will take over Fannie and Freddie under conservatorship, replacing their chief executives and eliminating their dividends. Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie.
``The market likes less uncertainty and this takes care of that,'' said E. William Stone, who oversees $66 billion as chief investment strategist at PNC Wealth Management in Philadelphia. ``If this helps re-stabilize the housing situation it's got to be looked at as a positive.''
Freddie lost 80 percent to $1.02, while Fannie Mae dropped 84 percent to $1.16. Citigroup and Lehman Brothers Holdings Inc. lowered their recommendations on the shares. Merrill Lynch & Co. cut its share-price forecast for Fannie Mae to 50 cents and its estimate for Freddie Mac to 25 cents.
Financial stocks in the S&P 500 had fallen 26 percent this year before today as banks from Merrill Lynch & Co. to Citigroup were forced to raise capital to cover losses stemming from the collapse of the subprime mortgage market. Fannie and Freddie had slumped more than 82 percent in 2008.
Preferred Shares
Banks with large holdings of Fannie Mae and Freddie Mac preferred shares may fail to join in the advance as the takeover eliminated the two companies' dividends.
Sovereign Bancorp Inc., the second-largest U.S. savings and loan, had stakes in Fannie and Freddie valued at $623 million as on June 30. Sovereign slid 2.3 percent to $9.44. Other lenders with significant holdings of Fannie and Freddie preferred shares include Gateway Financial Holdings Inc., Midwest Bank Holdings Inc. and Frontier Financial Corp.
Washington Mutual Inc. rose 18 percent to $5.02. The biggest U.S. savings and loan replaced Kerry Killinger as chief executive officer, naming Alan Fishman of Meridian Capital Group to replace him. Killinger's expansion into subprime mortgages contributed to $6.3 billion in losses in the past three quarters and an 88 percent slump in WaMu's stock in the past 12 months.
Goldman Sachs
Goldman Sachs Group Inc. climbed 5.4 percent to $172 in New York. Merrill Lynch & Co. analyst Guy Moszkowski raised his recommendation on the shares to ``buy'' from ``underperform.''
The rally in banks came even as Oppenheimer & Co. analyst Meredith Whitney slashed her third-quarter earnings estimates for Goldman, Lehman Brothers Holdings Inc., and Merrill Lynch & Co, citing a decline in trading volumes and share sales.
Schlumberger Ltd., the biggest oilfield-services company, and Exxon Mobil Corp., the largest U.S. energy company, gained as Hurricane Ike delayed the resumption of oil and natural gas production in the Gulf of Mexico, driving the commodities' prices higher. Crude oil rose for the first time in seven days and natural gas rose for a fourth straight day.
UST, Cognizant
UST Inc. gained 61 cents $68.16 in New York after Altria Group Inc. agreed to buy the largest U.S. snuff producer for $10.3 billion in cash.
Cognizant Technology Solutions Corp. added 3.5 percent to $28.71. Cognizant, which provides on-site computer-technology support as well as cheaper labor abroad, may climb to $40 a share as the U.S. and global economies recover, Barron's reported, citing Sanford C. Bernstein & Co. analyst Rod Bourgeois.
U.S. stocks declined last week, sending the S&P 500 to its steepest weekly retreat in three months, led by commodity producers as falling fuel and materials prices signaled global economic growth is slowing.
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.
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