U.S. Stocks Rally on Bank Plan; Morgan Stanley, Ford Surge

By Elizabeth Stanton

Oct. 13 (Bloomberg) -- U.S. stocks rallied after the market's worst week in 75 years, boosted by the government's plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars.

Morgan Stanley soared as much as 66 percent after sealing a $9 billion investment from Japan's Misubishi UFJ Financial Group In. Bank of America Corp. and Citigroup Inc. jumped more than 7 percent, while General Motors Corp. and Ford Motor Co., the largest U.S. automakers, climbed more than 27 percent each. European and Asian stocks also jumped, helping the MSCI World Index rebound from its worst week on record.

The Standard & Poor's 500 Index added 49.88, or 5.6 percent, to 949.1 at 10:32 a.m. in New York. The Dow Jones Industrial Average rose 441.65, or 5.2 percent, to 8,892.84. The Nasdaq Composite Index advanced 91.01, or 4.5 percent, to 1,740.52. Nine stocks gained for each that fell on the New York Stock Exchange.

``The measures that they've said they're going to take are important,'' said Quincy Krosby, who helps manage about $380 billion as chief investment strategist at the Hartford in Hartford, Connecticut. ``When we say stabilize the financial system, we're talking about money flowing, banks lending. That's what the market is waiting for.''

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's trading for 17 times reported earnings of its companies, the cheapest valuation in more than a year.

Global Plan

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 dollar swap arrangements between the Fed and other central banks were capped.

Citigroup climbed 4.6 percent to $14.76, Bank of America added 6.4 percent to $22.21, Merrill Lynch & Co. added 7.1 percent to $16.86 and Goldman Sachs Group Inc. rallied 7.5 percent to $95.46.

Morgan Stanley

Morgan Stanley rose $4.35 to $14.03 and gained as much as $6.42. Morgan Stanley agreed to change the terms of its $9 billion investment from Mitsubishi UFJ Financial Group Inc., 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.

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

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.

``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.''

Financials Gain

The S&P 500 Financials Index added 3 percent today. The gauge of banks, insurers and investment firms sank 22 percent last week. Morgan Stanley plunged 60 percent last week as Moody's Investors Service said it may reduce the U.S. bank's credit rating on concern the financial crisis threatens earnings and investor confidence. Goldman Sachs dropped 31 percent to $88.80 in the week.

Exxon Mobil Corp. climbed 2.7 percent to $64.04 after a 20 percent tumble last week. Oil gained as much as 6.2 percent to $83.52 a barrel today, rebounding from a 13-month low. General Motors gained 27 percent to $6.20 and Ford added 23 percent to $2.45.

Freeport-McMoRan Copper & Gold Inc. added 2.6 percent to $37.28 as copper on the London Metal Exchange rebounded from a 33-month low.

Apple Rebounds

Apple Inc. rose 5.9 percent to $102.55. 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 5.3 percent to $52.06. The maker of drug-coated heart stents said it will spend as much as $5 billion to buy back shares.

The benchmark index for U.S. stock options declined for the first time in six days. 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 Sachs Group Inc. cut its forecast for the S&P 500 by 29 percent to 1,000, while saying the benchmark index for U.S. equities is set for a potential ``strong'' year-end rally starting in late November, according to a note from equity strategists led by David Kostin.

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,'' suggesting there's ``a good chance'' the worst investor panic is over.

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