U.S. Stocks Rally Most Since 1930s on Bank Plan; Dow Gains 936

By Elizabeth Stanton
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Oct. 13 (Bloomberg) -- U.S. stocks staged the biggest rally in seven decades on a government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars.

The Standard & Poor's 500 Index rebounded from its worst week in 75 years with an 11.6 percent advance, its steepest since 1939, and the Dow Jones Industrial Average climbed more than 936 points. Morgan Stanley soared 87 percent after sealing a $9 billion investment from Japan's Mitsubishi UFJ Financial Group Inc. Alcoa Inc., Johnson & Johnson, Chevron Corp. and Prudential Financial Inc. posted their biggest gains since Bloomberg began tracking the data. Europe's benchmark index climbed 10 percent, its best jump ever, and Asia's added 3.1 percent.

``The worst of the immediate danger is past,'' said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, which manages $30 billion. ``It's always easier when you've got markets going up and you're not having to talk clients back in off the ledge.''

The S&P 500 rose 104.13 points to 1,003.35. The Dow increased 936.42, or 11 percent, to 9,387.61, eclipsing its previous record 499-point gain in March 2000 and posting its best percentage advance since 1933. The Nasdaq Composite Index climbed 194.74, or 12 percent, to 1,844.25. Sixteen stocks gained for each that fell on the New York Stock Exchange.

The S&P 500 halted an eight-day losing streak, its longest since 1996. Last week's 18 percent declines pushed both the S&P 500 and Dow down more than 40 percent from their peaks last October. The S&P 500 ended last week trading for 17 times reported earnings of its companies, the cheapest valuation in more than a year.

Global Rally

Today's rally boosted the index's price-to-earnings ratio to 19.2. The S&P 500 is still down 32 percent in 2008, poised for its worst yearly loss since 1937.

All 10 industries in the S&P 500 added more than 7 percent. The rally from Tokyo to New York sent the MSCI World Index up 9.5 percent, the biggest gain since the gauge was created in 1970.

Some 1.5 billion shares changed hands on the floor of the NYSE, less than 1 percent more than the three-month daily average. The bond market was closed for the Columbus Day holiday. The dollar fell the most in three weeks against the euro.

Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at ``healthy'' firms, will be voluntary and have attractive terms to encourage participation. As part of the Fed-led plan, the European Central Bank, the Bank of England and the Swiss central bank will auction unlimited dollar funds. Previous swap arrangements between the Fed and other central banks were capped.

Morgan Stanley

Morgan Stanley, the investment bank that last month turned itself into a bank holding company after investors lost confidence in firms that depend on the bond market for financing, rose $8.42 to $18.10. Morgan Stanley agreed to change the terms of its $9 billion investment from Misubishi UFJ, providing the Japanese bank with preferred stock that pays a 10 percent dividend instead of common stock.

Mitsubishi UFJ, Japan's biggest lender, will get 21 percent of the New York-based company as previously agreed, the two firms said today in a joint statement. The terms were renegotiated after the tumble in Morgan Stanley's shares last week.

Equity Stakes

The S&P 500 Financials Index added 10 percent after the gauge of banks, insurers and investment firms sank 22 percent last week, paced by Morgan Stanley's 60 percent plunge after Moody's Investors Service said it may reduce the company's credit rating on concern the financial crisis threatens earnings and investor confidence.

Goldman Sachs Group Inc. rallied 25 percent today to $111 after dropping 31 percent to $88.80 last week. Bank of America Corp. climbed 9.2 percent, while Citigroup Inc. added 12 percent.

The Treasury Department will take equity stakes in banks using authority it was granted under the $700 billion bank rescue plan enacted two weeks ago, Treasury Secretary Henry Paulson said over the weekend.

New Approach

``We're talking about making investments in these banks in a way that doesn't necessarily punish existing shareholders,'' Charles Bobrinskoy, vice chairman of Ariel Investments, which manages $13 billion, said on Bloomberg Television. ``Most of the bank actions to date in the U.S. have been good for bondholders but terrible for common stockholders.''

Government actions this year to prevent bankruptcies at investment bank Bear Stearns Cos., mortgage lenders Fannie Mae and Freddie Mac and insurer American International Group Inc. resulted in near-total losses for the firms' shareholders.

The collapse of New York-based Lehman Brothers Holdings Inc. on Sept. 15 precipitated the latest chapter of the 14-month-old credit crisis, causing banks to stop lending to each other out of concern they may not get their money back.

Insurance companies in the S&P 500, which slumped 28 percent last week as a group on concern the credit crisis will reduce the value of their investments, rebounded 18 percent today for their biggest advance since S&P created the group in 1989. Genworth Financial Inc. rallied a record 81 percent to $6.32 and Prudential Financial added 38 percent to $49.95.

XL Capital Ltd., the Bermuda-based business insurer whose stock is down 85 percent this year, jumped 37 percent to $7.43 after an analyst at Fox-Pitt Kelton Cochran Caronia Waller said the company may have to consider a sale.

Energy Rally

Exxon Mobil Corp., the world's largest oil company, climbed 17 percent to $73.08 after a 20 percent tumble last week, helping to lead the S&P 500 Energy Index to a record 18 percent rally. Chevron, the second-largest U.S. oil producer after Exxon, rose $12.06, or 21 percent, to $69.89. Crude oil gained 4.5 percent to $81.19 a barrel today, rebounding from a 13-month low.

General Motors Corp. jumped 33 percent to $6.51, the biggest gain in the Dow average, and Ford Motor Co. added 20 percent to $2.39. GM, the largest U.S. automaker, is in talks with Cerberus Capital Management LP's Chrysler LLC about a merger or partnership, five people with direct knowledge of the discussions said. Ford, the second-largest, is considering selling its controlling stake in Japan's Mazda Motor Corp., a person familiar with the matter said.

Freeport-McMoRan Copper & Gold Inc. added 25 percent to $45.37 as copper on the London Metal Exchange rebounded from a 33-month low. Alcoa, the largest U.S. aluminum producer, gained $2.57, or 23 percent, to $13.82.

`Opportunity of a Generation'

Apple Inc. jumped 14 percent to $110.26, its biggest gain in nine years. Sanford C. Bernstein & Co. analyst Toni Sacconaghi upgraded the maker of Macintosh computers and the iPhone to ``outperform'' from ``market perform,'' saying the shares are ``overly discounted'' after plunging 46 percent in two months.

Abbott Laboratories rose 9.6 percent to $54.21. The maker of drug-coated heart stents said it will spend as much as $5 billion to buy back shares. Johnson & Johnson, the world's largest maker of health-care products, increased $6.83, or 12 percent, to $62.68.

``This could be the buying opportunity of a generation,'' Kevin Divney, chief investment officer at Putnam Investments in Boston, said on Bloomberg Television. ``The real catalyst is the levels of valuation,'' Divney said. Putnam manages $137 billion.

General Electric Co. was the only member of the Dow average to decline, after JPMorgan Chase & Co. analyst C. Stephen Tusa said his forecast for profit of $1.80 a share next year may be too high.

VIX Retreats

The benchmark index for U.S. stock options declined 21 percent for its first drop in six days and steepest retreat in almost a year. The VIX, as the Chicago Board Options Exchange Volatility Index is known, measures the cost of using options as insurance against declines in the S&P 500. It averaged 59.43 last week, almost triple the 22.39 average in its 18-year history.

Goldman cut its forecast for the S&P 500 by 29 percent to 1,000, while saying the benchmark index is set for a potential ``strong'' year-end rally starting in late November, according to a note from strategists led by David Kostin.

Europe's Stoxx 600 advanced a record 9.9 percent, clawing back more than a third of last week's 22 percent slump.

Billionaire investor George Soros said the European agreement is a ``positive'' step that may help stabilize global financial markets.

``In the last 72 hours, I think the European governments got religion and realized that this is a serious problem,'' Soros said in Washington. ``People are looking for some leadership and finally they are getting it.''

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