U.S. Stocks Jump on Bond Insurer Bailout Plan, Oil's Retreat

By Eric Martin

Oct. 16 (Bloomberg) -- U.S. stocks rose for the first time in three days as oil's retreat below $70 a barrel sparked a rally in consumer companies and prospects of a government bailout of bond insurers reversed a slide in financial shares.

Ambac Financial Group Inc., the second-largest bond guarantor, jumped 48 percent after saying it will present a rescue plan to the Treasury Department. Wal-Mart Stores Inc. and McDonald's Corp. added more than 5 percent as crude slid to the lowest price in 16 months. The Dow Jones Industrial Average rebounded from a decline of as much as 380 points spurred by the biggest drop in industrial production in 34 years. The index swung by more than 700 points for the sixth straight day.

The S&P 500 advanced 38.59 points, or 4.3 percent, to 946.43. The Dow rallied 401.35 points, or 4.7 percent, to 8,979.26. The Nasdaq Composite jumped 5.5 percent to 1,717.71. About four stocks gained for each that fell on the New York Stock Exchange.

``We have a manic-depressive market,'' said Frederic Dickson, who helps oversee about $20 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. ``The speed at which markets are reacting to news right now is close to mind-numbing. If the bond insurers are going to line up at the Treasury, that's probably a good thing. Oil at $70 a barrel has just given the American public a tax break.''

Benchmark indexes halted a two-day slump that threatened to erase the S&P 500's 12 percent gain on Oct. 13, when the market rallied the most since the 1930s on speculation the government's plan to invest $250 billion in banks will ease the credit crisis. All 10 industry groups climbed at least 1.2 percent today.

Early Retreat

Stocks retreated earlier in the day, sending the S&P 500 down as much as 4.6 percent in morning trading, after Citigroup Inc. said bad loans may rise to a record high and the government said industrial production slumped 2.8 percent in September.

Wal-Mart, the world's biggest retailer, rallied $4.57, or 9.1 percent, to $54.62. McDonald's, the largest restaurant chain, added $2.91, or 5.7 percent, to $54.46. Target Corp., the second biggest U.S. discounter, jumped 6.1 percent to $37.91.

Macy's Inc., Big Lots Inc. and Nike Inc. and Coach Inc. all climbed more than 11 percent to lead the S&P 500 Consumer Discretionary Index to a 4.6 percent advance.

Oil fell and gasoline tumbled after a U.S. government report showed stockpiles increased more than twice as much as forecast. Crude for November delivery fell $4.69, or 6.3 percent, to $69.85 a barrel in New York, the lowest settlement since August 2007. It touched $68.57 a barrel, the lowest since June 27, 2007.

Bond Insurers

MBIA Inc., the largest bond insurer, jumped 32 percent to $9, trimming its 2008 loss to 52 percent. Ambac added 86 cents to $2.66, down 90 percent in the year.


Ambac and other bond insurers are working on a plan to send to the Treasury that would enable them to sell troubled assets to the government, Chief Executive Officer Michael Callen said. The companies also may present a proposal next week that would allow the insurers to guarantee some assets with government backing, Callen said in an interview today.

The Treasury's $700 billion program to buy troubled assets may allow the two guarantors to dispose of bonds backing collateralized debt obligations that they guaranteed, Royal Bank of Scotland Plc analyst Michael Cox said. Banks also may be more willing to cancel credit-default swap contracts they bought from bond insurers if the banks can sell the underlying CDOs to the government, Cox wrote.

Plunge Reversed

The S&P 500 Financials Index reversed a drop of as much as 6.8 percent to close 1.7 percent higher, as the bond-insurer plan spurred a rally in the last half hour of trading.

Citigroup Inc. pared a decline of 9.7 percent, ending down 2 percent to $15.90 and extending this year's loss to 46 percent. The second-biggest U.S. bank by assets reported a fourth consecutive quarterly deficit after at least $13.2 billion of loan losses and securities writedowns. Executives on a conference call said card and mortgage loss rates may exceed historical peaks.

American Express Co., the largest card network by purchases, retreated 77 cents to $23.64, the biggest loss in the Dow.

CIT Group Inc. dropped $1.77, or 38 percent, to $2.91, the steepest decline in the S&P 500. The commercial lender that repaid some debt early this year to assure investors it's solvent lost money for a sixth quarter as it wrote down the value of a unit that lends to companies to fund equipment purchases.

Yahoo Climbs

Yahoo! Inc. climbed as much as 17 percent after Microsoft Corp. Chief Executive Officer Steve Ballmer said a deal with the owner of the most-visited U.S. Web site may still make economic sense for shareholders of both companies. The shares pared their gains to 11 percent after Microsoft later e-mailed a statement saying it has ``no interest'' in acquiring Yahoo! Inc. and there are no discussions between the companies.

The S&P 500 Information Technology Index advanced 4.8 percent, as 67 of its 74 stocks gained.

Google Inc., owner of the most popular search engine, rallied in trading following the close of U.S. exchanges after profit topped analysts estimates as more customers used Web search ads. International Business Machines Corp., the biggest computer-services provider, jumped in extended trading after saying new service contracts amounted to $12.7 billion last quarter, topping estimates.

Peabody, ADM

Peabody Energy Corp. gained 18 percent, the fourth-most in the S&P 500. The largest U.S. coal producer rose $4.44 to $28.68 after saying third-quarter profit grew more than 11-fold and 59 percent more than the average estimate of analysts surveyed by Bloomberg, on increased output and higher prices.

Archer Daniels Midland Co., the world's largest grain processor, added $1.75, or 11 percent, to $17.84. The stock was raised to ``buy'' from ``neutral'' by Merrill Lynch & Co. analysts, who increased their 2009 earnings estimate, saying the company will pay less for crops as their prices decline.

The S&P 500 Industrials Index climbed 4.3 percent. The group dropped as much as 4.3 percent earlier after the Federal Reserve said industrial production was hurt by hurricanes and an aircraft strike combined with the credit crunch to weaken manufacturing. A separate report showed manufacturing in the Philadelphia region dropped more than economists estimated to the lowest since 1990.

The S&P 500 has fallen in 10 of the past 12 trading days as the earnings outlook for companies in the index deteriorated. Profits fell 45 percent on average for the 53 companies that reported third-quarter results from Oct. 7 through this morning, according to Bloomberg data.

`Tough Months'

``The frozen credit markets and the shock coming out of these stresses we've had in the capital markets have exacted a toll on the real economy,'' U.S. Treasury Secretary Henry Paulson said in an interview with Bloomberg Television. ``We've seen that in some of the numbers recently. We're going to have a number of tough months here.''

Wall Street analysts forecast a 7.5 percent drop in earnings in the third quarter in a Bloomberg survey last week. Analysts have maintained forecasts for record profits even as the seizure in credit markets caused banks to stop lending to each other, sent U.S. stocks to the worst week in 75 years and prompted unprecedented efforts to cushion global economies.

Hartford Financial Services Group Inc. dropped 12 percent to $28.86 and Lincoln National Corp. slumped 15 percent to $23.47 after Fitch Ratings said U.S. life insurers face a ``significant'' risk of downgrades because of investment losses. Life insurers may have their ratings cut amid market volatility and because the firms sold retirement products linked to equities, Fitch said.

Rebound From Rout

The S&P 500 yesterday plunged 9 percent, its steepest retreat since the market crash of 1987.

All 10 S&P 500 industries fell more than 6 percent yesterday, with half of the market's losses coming in the final hour of trading. That triggered the biggest plunge in Japanese stocks in two decades and the biggest two-day drop in Europe's Dow Jones Stoxx 600 Index since 1987 today.

About $1.1 trillion in value was erased from all U.S. equities yesterday. The declines came after a drop in retail sales was almost twice economists' estimates, sending Macy's Inc. and Dillard's Inc. down more than 15 percent. The Fed's index of New York manufacturing slumped to minus-24.6, a record low. The data overshadowed a retreat in money-market rates and better-than-estimated earnings reports from JPMorgan Chase & Co., Coca-Cola Co. and Intel Corp.

The S&P 500 has tumbled 36 percent this year and is down almost 40 percent from its record close in October 2007. The Dow has plunged 32 percent in 2008 and is 37 percent below its peak set the same day.

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