U.S. Stocks Rally, Dow Jones Industrials Climb 889 Points

By Lynn Thomasson and Eric Martin

Oct. 28 (Bloomberg) -- Stocks rallied and the Dow Jones Industrial Average posted its second-best point gain as the cheapest valuations in 23 years lured investors and increased commercial paper sales signaled credit markets are thawing.

Alcoa Inc. jumped 19 percent, leading the Dow to an almost 900-point advance, after the shares slid to their lowest price- to-earnings ratio on record. General Electric Co., the largest issuer of commercial paper, soared 9.9 percent after sales of longer-term debt grew 10-fold yesterday as the Federal Reserve entered the market for corporate IOUs. Citigroup Inc. and Bank of America Corp. rose more than 12 percent as traders boosted bets the Fed will cut interest rates tomorrow.

The Standard & Poor's 500 Index gained 91.59 points, or 11 percent, to 940.51 after sliding to the lowest level since March 2003 yesterday. The Dow climbed 889.35 points, or 11 percent, to 9,065.12. Hong Kong's benchmark index added 14 percent, its best advance in 11 years, while Germany's climbed 11 percent and Brazil's jumped 13 percent.

``The valuations are extremely compelling right now,'' said Dan Veru, who helps manage about $2 billion at Palisade Capital Management in Fort Lee, New Jersey. ``When you're in extreme oversold conditions, the market is prone to these types of wild swings. The key thing is, can we hold these gains?''

Valuation Watch

The S&P 500 was valued at 10.7 times estimated profit when trading opened today, the cheapest compared with the multiple using trailing profit since at least 1985. The index was also 25 percent below its average closing price over the last 50 days, a level reached only four previous times, spurring average gains of about 20 percent over the next six months.

The Dow's only larger point gain was on Oct. 13, when the 30-stock gauge jumped 936 points on the government's plan to buy stakes in banks.

More than nine stocks rose for each that fell on the New York Stock Exchange, where trading volume of 1.7 billion shares was 18 percent greater than the three-month daily average.

Equities around the world tumbled this month, wiping out more than $12 trillion of market value before today, after money markets froze, banks' credit losses climbed to almost $678 billion and economic growth weakened. The S&P 500, which dropped 3.2 percent yesterday, trimmed its monthly decline to 20 percent today.

Citigroup increased 14 percent to $13.41 and Bank of America rose 12 percent to $23.02. The S&P 500 Financials Index jumped 13 percent, the gauge's best advance since September.

Fed Bets

The Fed will announce its decision on interest rates tomorrow. Futures trading suggests a 38 percent chance the central bank will cut the benchmark rate by three-quarters of a percentage point, to 0.75 percent. By contrast, only one of 64 economists foresees that outcome, according to a Bloomberg survey. The rest of the Fed funds futures bets point to a half- point cut.

Alcoa added $1.74 to $10.78. The stock dropped 71 percent this year, leaving it valued at 4.86 times earnings as of yesterday, the cheapest on record.

``Anyone who has a long-term view and looks at earnings multiples and inflation will say it's a cheap moment to buy stocks,'' said Linda Duessel, equity market strategist at Pittsburgh-based Federated Investors Inc., which manages more than $333 billion.

Commercial Paper

GE rose $1.76, or 9.9 percent, to $19.49. The Fed started buying commercial paper yesterday, when companies sold 1,511 longer-term issues totaling a record $67.1 billion of debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to Fed data. The central bank probably absorbed about $60 billion of the total, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc.

Exxon Mobil Corp. advanced $8.77, or 13 percent, to $74.86. Chevron Corp. climbed 13 percent to $70.02. Energy shares in the S&P 500 jumped 12 percent as a group.

Morgan Stanley boosted holdings of Exxon and AT&T Inc. in its U.S. model portfolio, citing the ``defensive'' qualities of the shares.

Exxon had its position doubled to 4 percent because the world's biggest energy company is likely to be ``a far better than average performer'' if some stability returns to the markets, according to analyst Douglas Cohen. AT&T's position was increased to 3 percent from 2 percent. Shares of the largest U.S. phone company rose 13 percent to $27.61.

Valero Energy Corp. jumped 11 percent to $16.81. The largest U.S. refiner posted a smaller decline in third-quarter earnings than analysts predicted after crude-oil costs retreated from an all-time high, easing a squeeze on profit margins.

GM Climbs

General Motors Corp. rose 15 percent to $6.25. Money may be available to U.S. automakers from the federal bailout fund, White House spokeswoman Dana Perino said. GM's Chief Executive Officer Rick Wagoner is pushing for federal aid as the company seeks to merge with Chrysler LLC, people close to the discussions said.

Discover Financial Services climbed 20 percent to $11.65. Visa Inc. and MasterCard Inc., the world's largest credit-card networks, agreed to pay Discover $2.75 billion to resolve a lawsuit settled earlier this month. Discover had accused MasterCard and Visa of blocking banks from issuing their cards.

Boeing Co. gained 15 percent to $48.91. Machinists for the second-largest planemaker plan to vote within five days on a proposed contract to end an eight-week strike.

Wal-Mart Stores Inc. increased 11 percent to $55.17. The world's largest retailer plans to increase international capital spending as it expands in China, Brazil and other emerging markets. The company is ``well positioned'' to meet demands of consumers around the world as the global economy slumps, Mike Duke, Wal-Mart's international chief, told analysts at a meeting.

Interpublic, Fidelity National

Interpublic Group of Cos. gained 35 percent to $5.54, the third-steepest gain in the S&P 500. The second-largest U.S. owner of advertising agencies reported a profit in the third quarter, weathering the economic slowdown through cost cuts and increased international sales.

Fidelity National Information Services Inc. increased 27 percent to $15.87. The payment processor forecast earnings, before certain items, of as much as 49 cents a share in the fourth quarter. Analysts, on average, anticipated 46 cents, according to a Bloomberg survey.

Morgan Stanley increased 11 percent to $15.20 and Goldman Sachs Group Inc. added 69 cents to $93.57. Morgan Stanley lost as much as 26 percent and Goldman fell as much as 11 percent during the day amid speculation a surge in Volkswagen AG shares may have saddled some banks with losses. Germany's financial-markets regulator is looking into trading of Volkswagen stock after Porsche SE's plan to raise its stake in the automaker triggered a fourfold increase in two days.

`Bottoming Process'

Morgan Stanley has ``virtually no exposure,'' to Volkswagen, spokesman Mark Lake said. Goldman Sachs has no significant losses tied to Volkswagen, CNBC reported, citing unidentified sources at the firm. Goldman spokesman Ed Canaday declined to comment.

``We're in the camp that believes a bottoming process is in place,'' said Leo Grohowski, chief investment officer for the wealth management unit of Bank of New York Mellon Corp., which manages $162 billion. ``Unless we really thought the banks were going under, there's an awful lot of bad news that is already priced into the shares.''

Banks also advanced as borrowing costs declined after cash injections by the central banks showed signs of easing the paralysis among lenders. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 4 basis points to 3.47 percent today, according to the British Bankers' Association. It was the 12th straight drop for the rate.

Treasury's `TARP'

The Treasury is buying equity stakes in banks as a way to inject capital into the struggling financial system. Nine of the nation's biggest banks may receive $125 billion from the $700 billion Troubled Asset Relief Program as soon as this week, and a growing number of regional lenders have announced preliminary approval to take part in the program.

The Treasury also will use the TARP to acquire illiquid mortgage-related assets from a range of financial institutions to make more room on their balance sheet. This effort is moving more slowly as the Treasury selects asset managers to run the debt- buying effort.

Japan's Nikkei 225 Stock Average today rallied from a 26- year low to gain 6.4 percent, while Hong Kong's Hang Seng Index recouped yesterday's 13 percent plunge. The MSCI Asia Pacific Index added 3.4 percent, while Europe's Dow Jones Stoxx 600 Index climbed 2.3 percent.

To contact the reporters for this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net.