U.S. Stock Futures Advance on Fed Plan to Buy Commercial Paper

By Elizabeth Stanton

Oct. 7 (Bloomberg) -- U.S. stock-index futures advanced, erasing earlier declines, after the Federal Reserve said it will purchase short-term corporate loans to help unlock credit markets.

National City Corp. and Sovereign Bancorp Inc. climbed more than 6 percent while General Electric Co. added 3 percent after the central bank said it will create a fund to backstop the U.S. commercial paper market. Advanced Micro Devices Inc. rallied 22 percent on plans to spin off its manufacturing plants as part of an $8.4 billion investment from Abu Dhabi.

Standard & Poor's 500 Index futures expiring in December jumped 15.3 points to 1,068.6 at 9:06 a.m. in New York. Dow Jones Industrial Average futures added 95 to 10,059. Nasdaq-100 futures rose 1.3 percent to 1,425.

U.S. stocks dropped yesterday, driving the Dow average below 10,000 for the first time in four years, as bank bailouts in Europe widened.

Asian shares pared declines today and most European stocks advanced after Australia's central bank reduced interest rates by the most since 1992.

``With the Australians cutting interest rates by 100 basis points, it has got investors hopeful that there are going to be significant cuts in either Europe or America,'' said Felix Wintle, head of U.S. equities at Neptune Asset Management in London, where he helps oversee about $4.1 billion. ``That is what is getting people excited.''

Futures on the Chicago Board of Trade show a 50 percent probability the Fed will reduce its 2 percent target rate by three-quarters of a percentage point to 1.25 percent at its Oct. 29 meeting, with the rest of the odds pointing to a half-point cut. Traders a month ago saw no chance of a three-quarter point cut.

AMD Rallies

AMD, the chipmaker struggling to compete with Intel Corp., said Abu Dhabi will pay $700 million for a stake in a new company that will own two plants in Germany and build another in New York. The new company, which will assume $1.2 billion of AMD's debt, will receive as much as $6 billion from Abu Dhabi to expand the factories and get $1.4 billion in operating capital. Abu Dhabi will also pay $314 million to double its stake in AMD to 19 percent.

Third-quarter profits are forecast to decrease an average 5.6 percent for companies in the S&P 500, according to an Oct. 3 survey of analysts by Bloomberg. The slump would mark the fifth straight quarter of declining earnings.

Financial companies are forecast to lead the drop in profits with a 64 percent decrease, followed by an 11 percent slide in earnings at retailers, hoteliers, restaurant chains and other so-called consumer discretionary companies.

Valuation Watch

The S&P 500 has tumbled 32 percent from its record last October. Still, the benchmark index for U.S. equities trades at 20 times the earnings of its companies over the past 12 months, 11 percent more than its price-to-earnings ratio as the 5 1/2- year long profit expansion came to a close at the end of the second quarter of 2007. The gauge is valued at 12.6 times estimated earnings of its companies over the next 12 months.

``Nobody is talking about valuation, but on very conservative earnings expectations for the next 12 months this market at minimum is starting to look reasonably valued,'' Leo Grohowski, chief investment officer for the wealth management unit of Bank of New York Mellon Corp., told Bloomberg Television. The unit manages $162 billion. ``Times when it feels almost irresponsible to shore up equities, they tend to be good buying opportunities historically.''

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.