U.S. Stocks Advance, Rebounding From Worst Drop Since October

By Elizabeth Stanton

Dec. 2 (Bloomberg) -- U.S. stocks rallied, rebounding from the market’s worst tumble since October, after General Electric Co. announced plans to maintain its dividend and the Federal Reserve extended terms of three emergency loan programs.

GE jumped 14 percent and contributed the most to the gain in the Standard & Poor’s 500 Index. Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co. advanced at least 9 percent to lead a recovery in S&P 500 financial shares a day after the group’s biggest drop on record. All 24 industry groups in the S&P 500 rose as the index climbed 3.5 percent in the last 90 minutes of trading.

“A lot of pretty lousy expectations are already figured in,” Jack Ablin, chief investment officer at Harris Private Bank in Chicago, which oversees about $60 billion, told Bloomberg Television. “As long as expectations are this low, at least the bar is going to be easy to hurdle.”

The S&P 500 added 32.6 points, or 4 percent, to 848.81. The Dow Jones Industrial Average surged 270 points, or 3.3 percent, to 8,419.09, with 28 of its 30 companies rising. The Nasdaq Composite Index climbed 3.7 percent to 1,449.8. Seven stocks increased for each that fell on the New York Stock Exchange.

The S&P 500 yesterday tumbled 8.9 percent after an industry report showed manufacturing contracted at the fastest pace in 26 years. U.S. stock swings will be more than triple the average over the next seven months as investors contend with a global recession and the worst returns since the 1930s, volatility futures show.

VIX Watch

May contracts on the Chicago Board Options Exchange Volatility Index, or VIX, closed yesterday at 43.80, while futures expiring before then trade at higher levels, showing investors expect the S&P 500 to rise or fall at least 2.8 percent a day through June 17, according to data compiled by Bloomberg. The last time the benchmark index for U.S. stocks moved that much during the same-sized span was 1932.

“We are in very volatile times,” Scott Richter, a money manager at Fifth Third Asset Management, said on Bloomberg Television. “It could go another three to six months before we truly bottom because the recovery has been prolonged.”

Europe’s Dow Jones Stoxx 600 Index advanced 1.7 percent, reversing an earlier drop of 2.3 percent. The MSCI Asia Pacific Index decreased 4.5 percent as China Petroleum & Chemical Corp. dropped 5.6 percent.

GE’s Payout

GE, the biggest maker of jet engines and power plant turbines, advanced $2.11 to $17.61 after saying it plans to pay its $1.24-per-share dividend in 2009. While fourth-quarter profit will be at the low end of the company’s forecast, steps it’s taking to bolster its finance unit will help protect the dividend, GE said.

GE’s commitment to its payout comes while dividends are disappearing at the fastest rate in 50 years as the recession forces companies to conserve cash. Citigroup Inc., Genworth Financial Inc. and New York Times Co. led at least 91 companies listed on the biggest U.S. exchanges in reducing or suspending payouts in November, the most since May 1958, according to data compiled by Standard & Poor’s.

Wells Fargo climbed 11 percent to $25.89. JPMorgan Chase added 9.2 percent to $28.53. Bank of America gained 12 percent to $14.37. Banks, insurers and investment firms in the S&P 500 slumped 17 percent as a group yesterday, the steepest drop for the S&P 500 Financials Index since the gauge was created in 1989. The group advanced 7.9 percent today for the steepest gain among the 10 main industries in the S&P 500.

Emergency Loans

The Fed extended the terms of the emergency-financing programs to April 30 from January 30, aligning their expiration dates with other central bank efforts to mitigate the global credit crisis. The programs enable financial institution to obtain loans that are no longer available from private investors at affordable rates.

The central bank is scheduled to meet on Dec. 16. Futures traders see a 60 percent chance policymakers will cut the benchmark rate by 50 basis points to 0.5 percent. There’s a 7.2 percent probability rates will be reduced to zero percent in January, according to Fed fund futures.

Fed Chairman Ben S. Bernanke yesterday said he has “obviously limited” room to lower rates further and may use less conventional policies, such as buying Treasuries. Even so, reducing borrowing costs is “certainly feasible,” he said.

Ford Motor Co., the second-largest U.S. automaker, gained 5.9 percent to $2.70. General Motors Corp., the biggest, added 5.7 percent to $4.85.

‘Not an Option’

Ford and GM delivered plans to Congress as part of their pursuit of federal aid to avoid bankruptcy, spurring gains in the shares even as automakers said U.S sales tumbled in November. The stocks extended gains in trading after the close of exchanges as Rep. Nancy Pelosi, the Speaker of the House of Representatives, said bankruptcy is “not an option” for the industry.

Ford asked Congress for a credit line of as much as $9 billion, saying it expects to break even or be profitable before taxes in 2011. GM asked for as much as $12 billion in loans as well as a $6 billion line of credit should industry conditions worsen.

GM earlier said sales dropped 41 percent in November, while Ford’s were down 31 percent. Toyota Motor Corp., Asia’s biggest automaker, posted a 34 percent decline and Honda Motor Co. slid 32 percent. The results showed the strain of the deepening economic slowdown and GM’s announcement last month that it might not have enough cash to last through the year.

Energy Valuations

Exxon Mobil Corp. led energy companies higher even as crude oil fell to a three-year low of $46.96 a barrel, down 4.7 percent in the day and more than $100 from July’s record. Exxon climbed $3.30, or 4.4 percent, to $77.61.

The S&P 500 Energy Index, which is down 38 percent this year, climbed 3.7 percent. The group traded at 6.29 times the reported earnings of its companies at the open of U.S. exchanges. That compares with last week’s low of 5.63, the cheapest since Bloomberg began tracking the data in 1995.

The entire S&P 500 was valued at a price-to-earnings ratio of 17.66 at the open, compared with a monthly average this decade of almost 26.

“We are seeing valuations that we haven’t seen in decades, literally,” said Mike Allocco, portfolio manager at Brazos Capital Management LP in Dallas, which oversees $300 million. “Three quarters of my portfolio is trading at a P/E of 10 or below. If you can be patient and wait out the bottoming process, which can be difficult and emotional, the next time we begin a sustainable rally and hopefully a new bull market, there’s going to be a tremendous amount of money to be made.”

Retesting Lows Possible

The S&P 500 capped its biggest five-day rally since 1933 last week after the government agreed to protect Citigroup Inc. from further losses. The index is still down 42 percent this year as credit losses and writedowns at financial firms approach $1 trillion and more economists forecast that the U.S. recession will be one of the most severe in the post-World War II era.

A key currency exchange rate suggests U.S. stocks may resume their decline, according to a report today by Merrill Lynch & Co. technical analyst Steve Miley. Over the past six months the value of the British pound against the Japanese yen has been a reliable indicator of the direction of the U.S. stock market, and the rate touched an 18-year low of 137.13 yen today.

The S&P 500 is likely to retest its 2008 low, Miley wrote in the report. A drop below that level would likely mean a decline to 738.3, representing a 38.2 percent reversal of the rally that began after the 1987 crash, Miley wrote. Reversals of certain magnitudes, including 38.2 percent, are considered important in technical market analysis, which bases predictions on chart patterns.

‘Buying Aggressively’

The U.S. entered a recession in December 2007, the panel of economists that dates American business cycles said yesterday.

“It looks as though the recovery is going to take a little longer than people thought,” said Paul Kandel, a New York-based money manager at Sentinel Asset Management, which oversees about $4.5 billion. “The question is whether it’s six months away or 18 months away. If you think it’s six months away, you’re probably buying aggressively now. If you think it’s 18 months away, you’re probably in no rush.”

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