U.S. Stocks Advance as Government Pledges More Aid for Banks

By Lynn Thomasson

Feb. 23 (Bloomberg) -- U.S. stocks gained for the first time in six days, extending a global advance, after financial regulators pledged to inject more cash into the nation’s banks to prevent their collapse.

Bank of America Corp. rallied 13 percent, Citigroup Inc. jumped 11 percent and JPMorgan Chase & Co. added 6.4 percent after officials said the U.S. has a “strong presumption” for banks to stay private even as it prepares to identify companies that need more funds. Exxon Mobil Corp. and Chevron Corp. rose more than 2 percent as oil prices climbed to an eight-day high. Stocks in Europe and Asia increased, sending the MSCI World Index higher for the first time in 10 days.

The Standard & Poor’s 500 Index added 0.6 percent to 774.43 at 9:47 a.m. in New York. The Dow Jones Industrial Average increased 52.17 points, or 0.7 percent, to 7,417.84 after dropping to a six-year low on Feb. 20. The Russell 2000 Index climbed 0.2 percent.

“They are going out of their way to say they’re in favor of a private banking system,” said Dan Greenhaus, an analyst in the equity strategy group at Miller Tabak & Co. in New York. “Seeing as how the rumors of nationalization didn’t come to pass, people are riding a little high as a result.”

The S&P 500 snapped its longest losing streak since October as regulators said they will begin examining which banks have enough capital to survive a deeper economic slump. Banks that need additional funds after the so-called stress tests and cannot raise the money from private investors will be able to tap additional taxpayer funds. The capital would be in the form of “mandatory convertible preferred shares” that would be exchanged into common stock “only as needed.”

Worst Start

The S&P 500 last week extended its worst start to a year to 15 percent as President Barack Obama failed to assuage investors by approving a $787 billion economic stimulus plan that combines tax breaks and government spending meant to resuscitate the moribund U.S. economy. Homebuilders and banks retreated even after Obama announced a plan to stem home foreclosures.

The MSCI Asia Pacific Index increased 0.3 percent today and Europe’s Dow Jones Stoxx 600 Index gained 0.8 percent.

Bank of America climbed 49 cents to $4.28. Citigroup rallied 21 cents to $2.16. JPMorgan, the second-biggest U.S. bank, added $1.11 to $21.01.

Citigroup is in talks with federal officials that may result in the government holding as much as 40 percent of its common stock, the Wall Street Journal said. Executives at the bank would prefer the stake to be closer to 25 percent, the newspaper reported. Citigroup spokesman Jon Diat declined to comment.

Government Efforts

Governments across the world are stepping up measures to stem the worst global recession since World War II. Bank of America and Citigroup have received a combined $90 billion in U.S. aid in four months.

“The government measures will prevent the world from going under,” said Rudolf Buxtorf, who manages the equivalent of $114 million at RBS Coutts Bank in Zurich. “We won’t see a bankruptcy or an even worse catastrophe.”

Exxon increased 2 percent to $72.64. Chevron climbed 2.6 percent to $66.73.

Crude oil climbed as the Organization of Petroleum Exporting Countries signaled its resolve to support prices by reducing supplies. Oil for April delivery gained as much as 77 cents, or 1.9 percent, to $40.80 barrel, in electronic trading on the New York Mercantile Exchange.

Bank Debt

The cost of protecting against a default on senior and subordinated bank debt soared to a record in Europe, credit- default swap prices showed. The iTraxx Financial Index rose 5 basis points to an all-time high of 159, while the subordinated index climbed 15 to 315, according to JPMorgan prices.

The U.S. recession will be the worst in more than three decades as job losses mount and consumers and companies retrench, a survey of business economists showed. Billionaire investor George Soros said the current economic upheaval has its roots in the financial deregulation of the 1980s and signals the end of a free-market model that has since dominated capitalist countries.

General Motors Corp. increased 2.8 percent to $1.82. Advisers to the U.S. Treasury have taken steps to arrange loans of at least $40 billion for GM and Chrysler LLC, should the two automakers need the cash, the largest bankruptcy loan ever, the Wall Street Journal reported, citing unidentified people familiar with the situation.

Ford Motor Co., the second-biggest U.S. automaker, added 6.3 percent to $1.68.

Loews Gains

Loews Corp. rose 2.5 percent to $20.66. The diversified holding company may rally to almost $30 during the next year if financial markets stabilize and the value of the company’s assets recover, Barron’s reported, without citing anyone.

While the S&P 500 is trading close to the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent. A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago.

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