U.S. Stocks' Roller-Coaster Week Gives Dow Best Gain Since 2003

By Lynn Thomasson

Oct. 18 (Bloomberg) -- U.S. stocks ended a roller-coaster week with the Dow Jones Industrial Average climbing 4.8 percent after the government's plans to buy stakes in banks spurred the biggest one-day rally since the Great Depression.

The weekly gains, the best for the Dow since 2003, came despite the steepest one-day drop since the October 1987 crash. The 30-stock average surged more than 900 points on Oct. 13 and tumbled more than 700 points two days later on worsening retail sales data. The VIX, the benchmark index for U.S. stock options, closed yesterday at a record 70.33.

``This week has been incredibly volatile,'' said John Davidson, president of PartnerRe Asset Management Corp., which oversees $12 billion in Greenwich, Connecticut. ``There's relief that the government is doing something, but also a realization that it may take some time.''

The Standard & Poor's 500 Index lost 0.6 percent yesterday, dragged down by a record drop in consumer confidence and a 26- year low in housing starts, after swinging between gains and losses at least 28 times. The drop pared the measure's weekly climb to 4.6 percent, with a close at 940.55. The Dow average fell 1.4 percent to 8,852.22 yesterday.

The Dow jumped 11 percent on Oct. 13, rebounding from the worst weekly decline since 1914, on the government's plan to inject $250 billion into financial companies. Goldman Sachs Group Inc. surged 29 percent, the most in its 9-year history as a publicly-traded firm, to $114.30 after the Treasury Department said it would buy equity in nine of the biggest U.S. lenders.

Libor, Buffett

Nine out of 10 S&P 500 industries rose for the week. The London interbank offered rate showed credit markets are easing after the measure, which banks use to charge each other for three-month loans in dollars, fell for the first week since July. Warren Buffett's advice to buy American equities and better-than-estimated profit reports helped lift Coca-Cola Co. and Google Inc. for the week.

Sears Holdings Corp., the biggest U.S. department-store company, slumped 14 percent to $60.90 for a third week of losses. J.C. Penney Co. slid 6.8 percent to $21.09. Retail sales last month fell 1.2 percent, the most in three years, the Commerce Department reported, as mounting job losses and declining home prices drove Americans to cut back spending.

Bank Stakes

The government will buy preferred shares in Goldman, Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., JPMorgan Chase & Co., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Wells Fargo & Co., people briefed on the Treasury Department's plan said. All of the banks except JPMorgan and State Street rose for the week.

Equity injections will be voluntary, aimed at ``healthy'' firms and have attractive terms to encourage participation, said Neel Kashkari, the Treasury official overseeing the $700 billion financial system rescue.

The European Central Bank, the Bank of England and the Swiss central bank also agreed to auction unlimited dollar funds. Previous swap arrangements between the Fed and other central banks were capped.

Asian and European stocks climbed. The MSCI Asia Pacific Index added 1.6 percent, snapping a six-week streak of losses. The Dow Jones Stoxx 600 Index rose 4.5 percent for the biggest jump since March 2007.

Morgan Stanley increased 99 percent to $19.24 for the steepest advance in the S&P 500. The New York bank sealed its $9 billion investment from Mitsubishi UFJ Financial Group Inc. and gave the Japanese lender preferred stock paying a 10 percent dividend.

Volatility Surges

The S&P 500, which moved more than 1 percent in 10 of the 13 trading sessions in October, is on track for its most volatile month since 1929, according to S&P analyst Howard Silverblatt. The VIX, as the Chicago Board Options Exchange Volatility Index is known, has tripled since the beginning of September.

Government reports released this week showed a struggling U.S. economy as industrial production fell the most in 34 years, losing 2.8 percent last month, and the Fed's Beige Book said tourism, retail and auto spending decreased.

The Reuters/University of Michigan preliminary index of consumer sentiment sank to 57.5 this month from 70.3 in September. The measure averaged 85.6 last year.

The prospect of a slowing economy after $660 billion in losses and writedowns from mortgage-related investments at banks has sent the S&P 500 down 36 percent this year. Buffett, the world's second-richest person, said he's buying U.S. stocks after the decline and urged investors to ``be greedy when others are fearful'' in an Oct. 17 New York Times column.

`Excellent Opportunities'

``This is the greatest investor of our time and he's in there seeing excellent opportunities in American companies,'' said Pat Becker Jr., chief investment officer at Becker Capital Management Inc. in Portland, Oregon, which oversees $1.7 billion. ``I've been doing this 18-plus years and I have never seen the opportunities that we have right now.''

MBIA Inc. rose the most since January, surging 60 percent to $9.40. Ambac Financial Group Inc. more than doubled to $3.49. Bond insurers may sell assets to the Treasury or guarantee securities on bank balance sheets with a government backstop, Ambac Chief Executive Officer Michael Callen said.

S&P 500 energy stocks gained 7.3 percent, a rebound from last week, when the industry lost a quarter of its value.

Exxon Mobil Corp., the world's largest oil company, jumped 9.1 percent to $68.04. Chevron Corp., the second-biggest U.S producer, increased 7.8 percent to $62.35. Both companies had losses exceeding 19 percent the previous week.

Oil Retreat

Oil futures fell 7.5 percent to $71.85 a barrel on the New York Mercantile Exchange, the third week of declines.

Peabody Energy Corp. posted the industry's top gain with a 12 percent advance to $32.03. The largest U.S. coal producer said third-quarter profit soared more than 11-fold on increased output and higher prices.

Coca-Cola, the world's largest soft-drink maker, had the biggest gain since 2003 with a 6.5 percent advance to $44.20. The world's largest soft-drink maker said third-quarter profit rose 14 percent, more than analysts estimated, as sales increased in China and India.

Google climbed 12 percent to $372.54, the most for the Internet search-engine operator since April. The company reported a 26 percent rise in third-quarter earnings and said customers are still buying Web ads even as the economy slows.

More than 140 S&P 500 companies will report third-quarter earnings next week, including Apple Inc., Caterpillar Inc. and McDonald's Corp. Wall Street analysts forecast an 11 percent drop in third-quarter earnings in a Bloomberg survey.

The index of U.S. leading economic indicators probably fell in September for a third month, led by declines in manufacturing, housing and stocks that may weaken growth into 2009, economists said before next week's report.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.