Brazil Stocks Rally Most in Month on Commodities; Bolsa Gains

By Alexander Ragir and William Freebairn

Nov. 24 (Bloomberg) -- Brazilian stocks rallied the most in a month, led by banks and commodity producers, after the U.S. government rescue of Citigroup Inc. reassured investors about the stability of the financial system and raw-material prices gained.

Uniao de Bancos Brasileiros SA and Banco Itau Holding Financeira SA surged more than 15 percent as JPMorgan Chase & Co. said the financial crisis worldwide may spur more consolidation. Petroleo Brasileiro SA jumped the most in a year after Goldman Sachs Group Inc. said the oil company may generate enough cash to develop the pre-salt region. Cia. Vale do Rio Doce led the rally in metal producers with a 13 percent advance.

“I would describe it as some hope when last week the market looked kind of hopeless,” said Jacopo Valentino, who oversees $4 billion as head of Latin American equity at BNP Paribas Asset Management in Sao Paulo. The Citigroup intervention “is even more positive outside the U.S. because there is no financial crisis here. The market was falling, mimicking the U.S. more that anything else, so once you take pressure off the U.S., you start looking at your own market.”

The Bovespa rose for the first time in six days, adding 9.4 percent to 34,188.83. It posted the biggest gain since Oct. 28. The BM&FBovespa Small Cap index gained 4.9 percent. The BM&FBovespa MidLarge Cap index rose 10 percent. Mexico’s Bolsa climbed 7 percent. Chile’s Ipsa advanced 2.1 percent. MSCI Emerging Markets rose 3.8 percent.

Global stocks rallied after Citigroup, facing the threat of a breakup or sale, received $306 billion of U.S. government guarantees for troubled mortgages and toxic assets to stabilize the second-largest U.S. bank by assets.

Banks Rally

Itau, which bought Unibanco to become Latin America’s biggest bank, rose 16 percent to 23.60 reais. Unibanco jumped 18 percent to 13.20 reais. Large Brazilian banks may benefit from the global financial crisis “from sector consolidation, central bank liquidity and higher spreads,” wrote Ben Laidler, JPMorgan’s Latin American equity strategist.

Banco do Brasil SA rose 9.6 percent to 12.50 reais. The largest government-controlled lender bought Sao Paulo state-owned Banco Nossa Caixa SA on Nov. 20. Brazil’s biggest banks will step up efforts to buy smaller rivals after a sell-off in the country’s equity markets boosted their takeover clout, Raymond James & Associates said Nov. 21.

Vale surged 2.69 reais to 23.44 reias. Latin America’s biggest steelmaker Gerdau SA rose 9.3 percent to 12.29 reais.

Demand for industrial metals and energy may be boosted by plans for a second Chinese stimulus package, announced this weekend. The National Development and Reform Commission, the nation’s top economic planning agency, proposed tax cuts, salary increases and larger housing subsidies. China is the world’s second-biggest oil consumer after the U.S.

Petrobras Gains

Petrobras, as Brazil’s state-controlled oil company is known, jumped 14 percent to 19.23 reais. Investor concern that Petrobras will have trouble paying for the development of expensive deep-water oil fields is “overdone,” wrote Goldman analyst Arjun N. Murti in a note to clients.

The company found oil in an onshore well in Brazil’s Espiritu Santo Basin, the country’s petroleum regulator said on its Web site.

The Standard & Poor’s GSCI index of 24 commodities increased 6.9 percent today. Commodities account for two-thirds of Brazilian exports, according to the Brazilian Exporters Association in Rio de Janeiro. About half of the Bovespa is made up of raw-material producers.

All America Latina Logistica gained 16 percent to 9.95 reais. Latin America’s biggest railroad operator was rated “buy” in resumed coverage at Raymond James on the outlook for “strong” earnings growth from its 2006 acquisitions and from the company’s increasing productivity, Eduardo Puzziello wrote.

Latin Outlook

Latin American stocks may rally 30 percent in U.S. dollar terms during 2009, according to Deutsche Bank AG’s head of equity strategy in the region.

The worst of the U.S. recession “will be over” by then and global equity markets will have fallen too far, Guilherme Paiva wrote. Brazil’s Bovespa may end 2009 at 45,000, a 44 percent gain from last week’s close. Mexico’s Bolsa index may advance 31 percent to 24,000 and Chile’s Ipsa may gain 27 percent to 3,000.

Desarrolladora Homex SAB rose the most in Mexico’s Bolsa index after Citigroup Inc. and Deutsche Bank AG said it an and Urbi Desarrollos Urbanos SAB are better positioned than rival homebuilders to grow. Mexican housing demand will exceed supply in 2009, Deutsche Bank said, citing the president of Mexico’s National Housing Commission, Carlos Gutierrez Ruiz.

Homex, the country’s biggest homebuilder, climbed 28 percent 34.91 pesos, the biggest gain since trading began in 2004. Urbi, the third biggest builder, advanced 12 percent to 19.77 pesos. The Habita index of Mexican homebuilders gained 15 percent after falling 18 percent last week.

Chile’s Ipsa snapped a five-day losing streak as Banco Santander Chile rose 8.8 percent after JPMorgan Chase & Co. recommended buying Chilean banking stocks.

Argentina’s Merval index climbed 8.8 percent, its first gain in six sessions, Colombia’s IGBC advanced 3.2 percent and Peru’s Lima General index rose 2.6 percent.

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; William Freebairn in Mexico City at wfreebairn@bloomberg.net.

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Mexico’s Peso Rises Most in Three Weeks After Citigroup Rescue

By Valerie Rota

Nov. 24 (Bloomberg) -- Mexico’s peso rose the most in more than three weeks after a U.S. government rescue of Citigroup Inc. fueled demand for higher-yielding, emerging-market assets.

“It is echoing a rally in global markets,” said Juan Carlos Lopez, head currency trader at Intercam Casa de Cambio SA in Mexico City. “A failure to rescue Citi would have been a terrible crisis.”

The peso gained 2.3 percent to 13.4013 per U.S. dollar at 5 p.m. New York time, from 13.7199 on Nov. 21. It rose the most since advancing 2.5 percent on Oct. 30.

Most emerging-market currencies gained against the dollar on speculation the Citigroup rescue will bolster financial- market stability and shore up economic growth. The U.S. is the biggest buyer of developing-nation exports, purchasing about 80 percent of Mexican goods sold abroad.

Citigroup, the second-biggest U.S. bank by assets, got $306 billion of U.S. government guarantees for troubled assets and a $20 billion cash injection after its stock plunged 60 percent last week. It gained 58 percent today, helping push up the Standard & Poor’s 500 Index by 6.5 percent.

Mexico’s peso remained higher after a central bank report showed annual inflation surged to a seven-year high in the first half of November. Consumer prices rose 6.18 percent in the first two weeks of this month compared with the same period a year ago, Banco de Mexico said today. They advanced 5.86 percent in the first half of October from a year earlier.

‘Some Support’

The inflation report suggests that Banco de Mexico, which targets inflation at 3 percent, will hold off from cutting its key 8.25 percent rate until the first quarter of 2009 even amid bets the U.S. Federal Reserve will reduce borrowing costs to 0.5 percent, Benito Berber, a strategist at RBS Greenwich Capital Markets, wrote in a research note.

A delay in a rate cut by Mexico’s central bank “will translate into some support for the peso,” Berber wrote. “However, the support coming from interest-rate differential will be marginal as the peso will be more influenced by the prospects of increased deterioration of the U.S. economy.”

Berber forecasts that the peso will weaken to 14.9 per dollar by the second quarter of 2009.

Merrill Lynch & Co. and Credit Suisse Group reduced their forecasts today for Mexico’s economic growth next year. Merrill expects the economy to expand 0.4 percent next year, down from a previous estimate of 0.9 percent. Credit Suisse cut its growth projection to 0.6 percent from 1.5 percent.

Yields on Mexico’s 10 percent bond due in December 2024, the most-traded security, dropped 24 basis points, or 0.24 percentage point, to 9.5 percent, the lowest level since Nov. 11. The bond’s price rose 1.98 centavos to 104.07 centavos per peso, according to Banco Santander SA.

To contact the reporter on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net.

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Coffee Futures Rise in New York as Dollar Drops, Equities Rally

By Yi Tian

Nov. 24 (Bloomberg) -- Coffee rose the most in more than a week as the declining dollar boosts demand for U.S. commodities and a rally in equities signals improved confidence in the economy.

The dollar fell for the second day against the euro after the U.S. government said it will guarantee $306 billion of troubled Citigroup Inc. assets. The Dow Jones Industrial Average was heading for its biggest gain in more than a week and the Reuters/Jefferies CRB Index of 19 raw materials rose as much as 5.4 percent.

“The dollar sounds pretty good today,” said Fain Shaffer, president of Infinity Trading Corp., a commodities brokerage in Medford, Oregon. “The Dow is up and many people use that as a gauge for demand.”

Arabica-coffee futures for March delivery gained 3.3 cents, or 3 percent, to $1.1405 a pound on ICE Futures U.S. in New York. That’s the biggest gain for a most-active contract since Nov. 12.

The Standard & Poor’s 500 Index was up 7 percent at 3:39 p.m. New York time after posting a gain of 6.3 percent on Nov. 21. The gauge was headed for the biggest two-day rally since 1987.

“Things livened up as a general improvement in stock markets saw a more positive mood spill over into primary commodities and in general across the complex, resulting in a further jump in coffee prices,” Ryan Bennett, a coffee and cocoa trader at Sucden (U.K.) Ltd., wrote today in a report.

Coffee also rose as cold weather in the Northern Hemisphere spurs consumption of the hot beverage, Shaffer said.

“The peak demand time for coffee is winter,” he said. “There’s technical buying going into this period of time.”

Lack of selling pressure helped too, said Jack Scoville, the president at Price Futures Group in Chicago.

Between Harvests

“We’ve passed the guts of the Brazil harvest now and Central America is just getting into harvest,” Scoville said. “There aren’t big sellers right at the time.”

Brazil is the world’s biggest producer of arabica beans and the second-biggest for robusta, trailing Vietnam. Vietnamese export growth slowed through November as stagnant global economies curbed demand for the nation’s products.

Arabica beans, the main variety traded in New York, are grown mostly in Latin America and are used by specialty coffee companies including Starbucks Corp. Robusta beans, mostly traded in London, are used in instant coffee and are mainly grown in Asia, Brazil and Africa.

In London, robusta coffee for January delivery rose $82, or 4.5 percent, to $1,895 a metric ton on the Liffe exchange.

To contact the reporter on this story: Yi Tian in New York at ytian8@bloomberg.net.

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Sugar Rises Most in 2 Weeks as Oil Gain May Boost Ethanol Use

By Ron Day

Nov. 24 (Bloomberg) -- Sugar surged the most in two weeks amid speculation that higher crude-oil prices will boost demand for alternative fuels, including ethanol made from cane.

Oil rose as much as 11 percent after a $306 billion government rescue of Citigroup Inc. sparked a rally in European and U.S. equities. The U.S. currency dropped, making dollar- denominated commodities more attractive to foreign buyers and pushing the Reuters/Jefferies CRB Index of 19 raw materials up as much as 5.4 percent.

``Sugar is being supported by the weaker dollar and stronger crude,'' said Michael McDougall, a senior vice president for Newedge USA LLC in New York.

Raw-sugar futures for March delivery rose 0.44 cent, or 3.9 percent, to 11.72 cents a pound on ICE Futures U.S. in New York. The gain was the biggest for a most-active contract since Nov. 4. Sugar has declined in each of the past three weeks.

Still, the sweetener has rallied 20 percent in the past 12 months, the biggest gainer on the CRB Index.

The euro gained as much as 2.7 percent against the dollar as Citigroup's bailout reduced demand for the greenback as a haven. The currency has gained in seven of the past eight weeks, while the CRB moved in the opposite direction.

Sugar will most likely trade between 10.5 cents and 13 cents a pound through the end of the year, McDougall said. It has been trading in that range since late last month.

``With credit still struggling, we'll be in a range,'' he said. The price may move higher in next year's first quarter, McDougall said.

In another commodity traded on ICE, orange-juice futures for January delivery declined 0.35 cent, or 0.5 percent, to 76.45 cents a pound. The price has declined 47 percent this year.

To contact the reporter on this story: Ron Day in New York at rday1@bloomberg.net.

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Cotton Prices Surge by N.Y. Exchange Limit on Dollar’s Slide

By Shruti Date Singh

Nov. 24 (Bloomberg) -- Cotton futures rose the most allowed by ICE Futures U.S. as the dollar tumbled and commodities rallied after U.S. President-elect Barack Obama named his economic team and Democrats promised another stimulus package.

The dollar fell as much as 2.7 percent against a weighted basket of six major currencies. The Reuters/Jefferies CRB Index of 19 raw materials jumped as much 5.4 percent. U.S. equities climbed after a U.S. government rescue of Citigroup Inc. boosted investor confidence.

“The dollar index down over 200 points, strong outside markets, general optimism over the Citibank situation and Obama’s economic team” supported cotton prices, Mike Stevens, an analyst with Swiss Financial Services in Mandeville, Louisiana, said in an e-mail.

Cotton futures for March delivery rose 3 cents, or 7.2 percent, to 44.8 cents a pound on ICE Futures U.S. in New York, the highest close for a most-active contract since Nov. 4.

Congress will send Obama an economic stimulus package on Jan. 20, the day he takes office, Democratic lawmakers said. Obama said he will nominate New York Federal Reserve Bank President Timothy Geithner as Treasury secretary.

Cotton has dropped 34 percent this year on concern that exports from the U.S. will decline as the recession reduces demand for textiles and clothing.

Rallies by corn, wheat and soybean futures today may support cotton, said Ron Lawson, a managing director at Lawson O’Neill Global Institutional Commodity Advisors LLC in Sonoma, California.

The crops compete for land in the U.S., and farmers planted 13 percent fewer acres with cotton in 2008 as grain and oilseed prices rose to records.

Wheat futures soared as much as 12 percent in Chicago. Corn rose as much as 6.9 percent, and soybeans gained as much as 7.1 percent.

Citigroup, the second-biggest U.S. bank by assets, got a government rescue package that shields the bank from losses on toxic assets and injects $20 billion of capital.

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net.

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IMF Approves $7.6 Billion Bailout Loan to Pakistan

By Christopher Swann and Khalid Qayum

Nov. 24 (Bloomberg) -- The International Monetary Fund approved a $7.6 billion bailout package to help prevent Pakistan from defaulting on its debt.

Pakistan is counting on IMF financing to help rebuild its foreign-exchange reserves, which shrank 75 percent in a year to $3.5 billion, and to attract investment that will boost an economy predicted to grow at the slowest pace in seven years.

“The Pakistani economy was buffeted by large shocks during fiscal year 2007 and 2008, including adverse security developments, higher oil and food import prices and the global financial turmoil,” said Takatoshi Kato, deputy managing director of the IMF.

To secure the IMF financing, Pakistan agreed to a “significant tightening of fiscal policy,” higher interest rates and an end to central bank financing of the government. The IMF said the loan included provisions to protect the poor, with social spending to be increased by 0.6 percentage point of gross domestic product this year to 0.9 percent of GDP. Pakistan plans to reduce its fiscal deficit from 7.4 percent of GDP in the past financial year to 4.2 percent in 2009.

Pakistan expects the IMF loan will help it win additional aid from a group of other lenders and donor nations, including the U.S., U.K., China and Saudi Arabia. The group’s Nov. 17 meeting in Abu Dhabi adopted a “work plan” for financial help to Pakistan, the Foreign Ministry has said.

Cost of Insurance

The cost of insuring a $10 million Pakistani government bond against the risk of default has more than doubled since the end of September to $2.28 million a year from $987,000 a year, according to CMA Datavision.

Last week Pakistan’s government said the country’s $150 billion economy was expected to grow 4.3 percent in the fiscal year ending June 30, 2009.

Growth may slow after central bank Governor Shamshad Akhtar increased the benchmark interest rate to 15 percent from 13 percent earlier this month as part of IMF loan conditions to curb inflation. Inflation is expected to exceed the government’s previous target of 12 percent.

Pakistan completed its last IMF program in 2004 with a credit rating from Standard & Poor’s of B+, four levels below investment grade. S&P cut the nation’s rating to CCC on Nov. 14, one day before the latest IMF loan was announced, citing a risk of default on external debt payments.

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net; Khalid Qayum in Islamabad at kqayum@bloomberg.net.

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U.S. Economy: Home Sales Fall, Record Drop in Prices

By Timothy R. Homan

Nov. 24 (Bloomberg) -- Home resales in the U.S. dropped in October and prices fell by the most on record, signaling a deepening housing recession going into 2009.

Purchases of existing homes slid to an annual rate of 4.98 million, lower than forecast, a National Association of Realtors report showed in Washington. The median price fell 11.3 percent from a year earlier, the most since the group began collecting data in 1968.

Today’s figures indicate a renewed downturn in an industry that showed signs of stabilizing this year, hurt by the credit squeeze and record mortgage foreclosures. That may raise pressure on President-elect Barack Obama to aid homeowners and potential buyers as he assembles a record stimulus package.

“Home sales will continue to fall over the next few months because of tightening credit conditions,” said Sal Guatieri, senior economist in Toronto at BMO Capital Markets, which had the closest estimate for the sales level among 67 forecasts in a Bloomberg News survey. “Underlying demand appears very weak” because “many sales are coming from cheap prices on foreclosed properties,” he added.

At a press briefing in Chicago today, Obama said one of his objectives will be “addressing the growing foreclosure crisis,” and he called on his economic team to develop a stimulus package of the “size and scope necessary to get the economy back on track.” Obama aides and Democratic Senator Charles Schumer have said a stimulus package of as much as $700 billion may be needed to shore up the economy.

Stocks Climb

Stocks rose for a second day on optimism a rescue of Citigroup Inc. and prospects for a new stimulus package will stabilize the financial system. The Standard & Poor’s 500 Stock Index closed up 6.5 percent to 851.81. Yields on benchmark 10- year notes rose to 3.33 percent at 5:31 p.m. in New York from 3.2 percent at last week’s close.

Existing home sales were forecast to fall to an annual rate of 5 million, according to the median estimate in the Bloomberg survey.

Sales dropped 3.1 percent from the previous month and 1.6 percent from a year earlier. Resales totaled 5.65 million in 2007. The median-sales price declined to $183,300.

Today’s figures compare with the 4.86 million level reached in June, the lowest in a decade and 33 percent below the record reached in September 2005. Resales have fluctuated around a 4.96 million rate this year.

The number of previously owned unsold homes on the market at the end of October represented 10.2 months’ at the current sales pace, up from 10 months’ at the end of the prior month.

Glut of Properties

“The large number of homes already on the market and the number of those that will appear via foreclosure over the next several months only add to the diminished prospects for existing home sales,” Maxwell Clarke, chief U.S. economist at IDEAglobal in New York, said before the report.

The median price of an existing home was the lowest since March 2004. Prices fell in all regions of the country, led by the West. Falling home values make it harder to refinance mortgages and have pushed foreclosure filings up 25 percent in October from a year ago, according to RealtyTrac Inc., the Irvine-California-based seller of default data.

Resales account for about 90 percent of the market, while purchases of new homes make up the rest. Sales of existing homes are compiled from contract closings and may reflect contracts signed one or two months earlier.

Single-Family Resales

Today’s report showed resales of single-family homes fell 3.3 percent to an annual rate of 4.43 million. Sales of condos and co-ops declined 1.8 percent to a 550,000 rate.

Purchases declined from the previous month in all regions, led by a drop of 6 percent in the Midwest. Sales fell 1.2 percent in the Northeast, 3.2 percent in the South and 1.6 percent in the West. Compared with a year earlier, sales jumped 37.5 percent in the West, while declining in other regions.

“Markets where prices have plunged, the buyers are coming back and taking advantage,” Lawrence Yun, chief economist for the Realtors group, said at a press conference.

Home sales overall may be weighed down by a federal law that took effect Oct. 1 barring home sellers from providing down-payment assistance to purchasers.

Builders Scale Back

Builders are scaling back residential projects as home sales decline. Construction of new homes plummeted 65 percent through October from a peak in January 2006. The number of building permits issued last month fell to the lowest level since record-keeping began in 1960, a sign that declines in construction will continue to hurt the economy.

Companies are struggling to improve sales alongside a rise in foreclosures. Stuart Miller, chief executive officer of Lennar Corp., the second-largest U.S. homebuilder, said the housing market “continues to decline.”

“Clearly the market is weak,” Miller said in comments broadcast from a Nov. 11 UBS conference in New York. “Clearly the supply side of the homebuilding world is dominated by the foreclosures that are coming in faster and more furiously than in the past.”

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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Treasury, Fed Said to Unveil Plan to Bolster Consumer Financing

By Robert Schmidt and Scott Lanman

Nov. 24 (Bloomberg) -- The U.S. Treasury and Federal Reserve will unveil as soon as tomorrow a lending program to shore up the consumer-finance market, using money from the government’s $700 billion rescue, two people familiar with the effort said.

The Treasury and the Fed will help fund new loans packaged into securities for sale to investors, the people said. Treasury Secretary Henry Paulson, who scheduled a press conference for tomorrow, said two weeks ago that he wants to spur lending for automobile purchases and college education while also reducing the cost of credit-card debt.

Paulson and Fed Chairman Ben S. Bernanke are widening the scope of their rescue efforts after agreeing yesterday to guarantee $306 billion of Citigroup Inc.’s toxic assets. Paulson has spent most of the first half of the government’s Troubled Asset Relief Program aiding Wall Street banks, and pressure is growing in Congress to help average Americans.

“Paulson needs to be seen taking a leadership position,” said Axel Merk, president of Merk Investments LLC in Palo Alto, California. “The markets are desperately looking for guidance on the way forward.”

Senator Charles Schumer, a New York Democrat, urged the Treasury and Fed today to use the $700 billion fund to make it easier for automakers’ finance units to lend.

“It is vital that this facility be established immediately and in sufficient size to allow consumers reasonable access to credit for auto purchases,” Schumer said in a letter to Bernanke, Paulson and Neel Kashkari, the official in charge of the bailout program.

Paulson previewed the new program in a Nov. 12 speech, when he said the Treasury and Fed were “exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.” The government could use some of the bailout fund to encourage private investors to re-enter the market, he said.

“Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy,” Paulson said.

Fed spokeswoman Michelle Smith declined to comment.

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.

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Wheat Jumps After Citigroup Rescue Boosts Investor Confidence

By Tony C. Dreibus

Nov. 24 (Bloomberg) -- Wheat prices rose the most in almost four weeks on speculation that the U.S. government’s rescue of Citigroup Inc. will boost consumer confidence and improve demand for commodities.

The Reuters/Jefferies CRB Index of 19 raw materials rose as much as 5.4 percent, led by a surge in energy pries. The Standard & Poor’s 500 Index gained as much as 6.8 percent after Citigroup, the second-biggest U.S. bank, got a government package that shields the lender from losses on toxic assets and injects $20 billion of capital.

“We’ve got these outside markets dominating the trading action in the grains,” said Larry Glenn, an analyst at Frontier Ag in Quinter, Kansas. “If people want to get bullish and they see crude oil rally, some say ‘I want to own grain’ knowing that oil has been the price director for the grain markets. It’s kind of a mob mentality.”

Wheat futures for March delivery rose 38.75 cents, or 7.5 percent, to $5.5675 a bushel on the Chicago Board of Trade, the biggest gain since Oct. 29. The price still is down 59 percent from a record $13.495 on Feb. 27.

Demand for U.S. wheat may climb because of the sliding dollar. The greenback dropped as much as 2.6 percent today against a basket of six major currencies, giving importers more purchasing power for U.S. goods.

The U.S. Department of Agriculture said today it inspected about 22.3 million bushels of wheat for export in the week ended Nov. 20, up 46 percent from the prior week. Since June 1, inspections still have declined 14 percent to 589.5 million bushels from a year earlier, agency data showed.

‘Help Exports’

“What these countries are buying now is small quantities,” Glenn said. “That may pick up if they see some problems with the winter crop. We had a great crop last year, but will we have that two years in a row? Probably not. They may try to secure some inventory. That would help our exports.”

Global production may fall because of the drop in prices this year and high fertilizer costs, UniCredit Group said in a report today. Wheat may reach $10 a bushel as global production falls 7 percent to 627 million tons in 2009, UniCredit said.

Growers in the U.S., the biggest exporter of the grain, may have planted fewer winter plants this year because of lower prices, analysts have said.

Wheat is the fourth-biggest U.S. crop, valued at $13.7 billion in 2007, behind corn, soybeans and hay, government data show.

To contact the reporter on this story: Tony C. Dreibus in Chicago at Tdreibus@bloomberg.net.

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Citigroup Bailout Charts New U.S. Course for Rescuing Banks

By Craig Torres and Robert Schmidt

Nov. 24 (Bloomberg) -- The U.S. government’s emergency rescue of Citigroup Inc. offers a new model for bank bailouts: explicitly insuring against losses on toxic assets, with taxpayers footing the bill.

The Citigroup plan extends the federal commitment beyond the previous framework of capital injections from the Treasury and credit from the Federal Reserve. Now, the U.S. is a partner in the performance of $306 billion in real-estate loans and securities, sharing losses beyond $29 billion on what are likely to be some of Citigroup’s worst holdings.

“Everybody and his brother has got to have their hand out now,” said Eric Hovde, chief investment officer at Hovde Capital Advisors, which manages $1 billion in financial-services stocks. “The whole problem is so much bigger and deeper than the Fed and Treasury ever understood.”

Taxpayers are likely to be at greater risk from the new template, which may be used to help more companies as debt writedowns continue to climb, analysts said.

“Every situation will need to be evaluated on a case by case basis, but obviously we are able to draw from our experiences as we work through these issues in the financial system,” Treasury spokeswoman Brookly McLaughlin said.

Citigroup’s crisis escalated as it was forced to take on its balance sheet a number of special units created to invest in riskier securities. The New York-based bank’s shares lost 60 percent last week, and then recouped some of those losses today after the government’s rescue. Other lenders remain vulnerable.

Weakened Banks

Wells Fargo & Co. is absorbing Wachovia Corp., the bank that regulators pushed in September to merge amid mounting losses from $120 billion in a portfolio of home loans. Bank of America Corp. has taken on both Countrywide Financial Corp., once the biggest independent mortgage lender, and Merrill Lynch & Co., the securities dealer hobbled by $24 billion of losses. Morgan Stanley slumped almost one third in the past three months.

Other banks “are going to show up” and ask for the Citigroup deal, predicted Joseph Mason, a professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.

The loss-sharing plan is another twist in the saga of Treasury Secretary Henry Paulson’s management of the $700 billion Troubled Asset Relief Program. Since the rescue fund was approved by Congress and enacted last month, Paulson has been criticized by lawmakers and others for not having a clear design for using the money. President-elect Barack Obama joined the chorus today.

‘Confusion’ on Strategy

There has been “confusion on what the overall direction might be” of the Bush administration’s plans, Obama said in a press conference in Chicago today. At the same time, he pledged to “honor the commitments” of the outgoing team.

“The model is that there is no model,” said V. Gerard Comizio, senior partner in the banking practice at the Paul, Hastings, Janofsky & Walker law firm in Washington. “It is an improvisation battle plan.”

Under the terms of the agreement, Citigroup will cover the first $29 billion of pretax losses from the $306 billion asset pool, in addition to reserves it already set aside.

Citigroup will accept 10 percent of losses above that amount, with the government responsible for 90 percent. The Treasury is second in line, taking $5 billion in losses, and the Federal Deposit Insurance Corp. is third, absorbing up to $10 billion. If the portfolio plummets through those triggers, the Fed steps in with a loan for the remaining assets.

Tack at Fed

The Fed’s exposure in the deal also represents a tack in the way the central bank has approached the crisis.

Since what was an effective purchase of $29 billion Bear Stearns Cos. assets in March, Fed officials have shown a preference for providing short-term credits for firms facing a cash squeeze.

The central bank’s balance sheet rose by $1.3 trillion in the past year as the Fed auctioned $415 billion of cash to banks and purchased $272 billion of commercial paper.

Fed officials have pushed to keep the risks involved in future bailouts at the Treasury, which would be forced to negotiate with Congress about the use of taxpayer funds.

Now, the Fed is stepping outside the liquidity boundary once again. The central bank took a step toward risk sharing earlier this month when it opened two new facilities with up to $52.5 billion in loans to help American International Group Inc. wind down its portfolio.

“It is clear that regulators still lack a comprehensive plan to address problems in our financial markets,” Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said through his spokesman Jonathan Graffeo. “It is unclear whether they have carefully considered the implications of their continued ad-hoc approach.”

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net

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Quiksilver, Hewlett-Packard, Pulte Homes: U.S. Equity Preview

By Lu Wang

Nov. 24 (Bloomberg) -- The following companies may have unusual price changes in U.S. trading tomorrow. Stock symbols are in parentheses.

Standard & Poor’s 500 Index futures expiring in December lost 2.10, or 0.2 percent, to 845.90. Dow Jones Industrial Average futures gained 349, or 4.3 percent, to 8,385. Nasdaq-100 Index futures slipped 3.7, or 0.3 percent, to 1,143.25.

Analog Devices Inc. (ADI US) fell 52 cents, or 2.9 percent, to $17.65 in trading as of 5:30 p.m., after the official close of exchanges. The maker of semiconductors for companies including Cisco Systems Inc. forecast profit, excluding some items, of as much as 23 cents a share in the first quarter. That result trailed the 36-cent average estimate from analysts in a Bloomberg survey.

Citi Trends Inc. (CTRN US): The clothing retailer reported a loss of 5 cents a share in the third quarter. That’s narrower than the average 11-cent loss estimated by analysts, according to a Bloomberg survey. The stock rose 15 percent to $8.63 in regular trading.

Hewlett-Packard Co. (HPQ US): The world’s biggest personal- computer maker reported a 10 percent increase in PC sales last quarter, beating some estimates, as demand for laptops held up in the face of a slowing economy. The stock rose 3.1 percent to $35.70 in regular trading.

Pulte Homes Inc. (PHM US): The third-largest U.S. homebuilder said it will stop paying dividends to conserve cash during the housing crisis. The stock rose 23 percent to $8.76 in regular trading.

Quiksilver Inc. (ZQK US): The maker of surfing and skateboarding apparel had its debt rating cut to B+ from BB- by Standard & Poor’s. The stock rose 46 percent to $1.30 in regular trading.

United Rentals Inc. (URI US): The largest U.S. construction- equipment rental company said it named William B. Plummer as chief financial officer, effective Dec. 1. Plummer most recently served as finance chief for Dow Jones & Co., the company said. The stock jumped 16 percent to $5.53 in regular trading.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

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U.S. Stocks Post Biggest Two-Day Rally Since 1987 on Citigroup

By Elizabeth Stanton

Nov. 24 (Bloomberg) -- U.S. stocks posted the biggest two- day rally since 1987 after the government guaranteed $306 billion of troubled Citigroup Inc. assets and lawmakers pledged to pass another economic stimulus package.

Citigroup, which lost 60 percent of its market value last week, rebounded 58 percent after the Treasury also agreed to inject $20 billion into the company. JPMorgan Chase & Co. and Bank of America Corp. jumped more than 21 percent, catapulting the Standard & Poor’s 500 Financials Index to a record gain, as the government rescue boosted confidence in the banking system. Home Depot Inc. and General Electric Co. climbed more than 8 percent on speculation the stimulus will spur economic growth.

The S&P 500 surged 6.5 percent to 851.81, capping a two-day gain of more than 13 percent. The Dow Jones Industrial Average climbed 396.97 points, or 4.9 percent, to 8,443.39. The Nasdaq Composite rose 6.3 percent to 1,472.02. Europe’s Dow Jones Stoxx 600 climbed 8.4 percent, while the MSCI Asia Pacific Index slipped 0.7 percent.

“Job one is to continue to repair the psychology of this market, and the bailout or the help for Citigroup is an important part of that puzzle,” James Dunigan, managing executive for investments at PNC Wealth Management in Philadelphia, said on Bloomberg Television. PNC Wealth Management oversees $63 billion.

Two-Day Rally

All but 35 stocks in the S&P 500 gained. Forty-five companies in the index advanced at least 20 percent as all 10 major industry groups in the main benchmark for American equities gained, led by financials. The 84 banks, brokers and insurers in the index soared almost 19 percent as a group, the steepest advance since the gauge was created in 1989.

Today’s advance followed a 6.3 percent rally in the S&P 500 on Nov. 21 after President-elect Barack Obama picked New York Federal Reserve Bank chief Timothy Geithner as Treasury secretary. The index has tumbled 42 percent this year and closed at an 11-year low on Nov. 20 after almost $1 trillion of financial-company losses caused corporate profits to decrease for five straight quarters.

Obama today announced Lawrence Summers, a former Treasury Secretary who stepped down as president of Harvard University in June 2006, as White House economic director. He said policy makers had to “act swiftly and act boldly” to avert the loss of millions of jobs next year.

‘Optimism Here’

“There’s an optimism here” that Obama “is going to be thoughtful and is working very hard right now to establish a fundamental foundation by the time he is inaugurated in January,” said Douglas Christopher, a partner at Crowell Weeden & Co. in Los Angeles, a regional brokerage firm with $7 billion under management.

Citigroup climbed $2.18 to $5.95 today, snapping a weeklong losing streak. The cash injection from the Treasury adds to the $25 billion the company received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend.

The Treasury, Fed and Federal Deposit Insurance Corp. said in a joint statement that the move aims to bolster financial- market stability and help restore economic growth.

President George W. Bush today said he is prepared to make other financial-rescue moves like the one to help Citigroup. Treasury Secretary Henry Paulson also is considering asking Congress for the remaining $350 billion in the Troubled Asset Relief Program to help revive consumer credit, a shift in position from six days ago.

‘Good Resolution’

“People went into the weekend very fearful about what could happen on the downside to Citigroup,” David Katz, chief investment officer of Matrix Asset Advisors, said on Bloomberg Television. “The fact that the government and Citigroup came up with a very good resolution is very positive for Citigroup in particular, and for the financials overall.”

JPMorgan added $4.86, or 21 percent, to $27.58 and Bank of America increased $3.12 to $14.59.

Concern that Citigroup may need a government rescue sent bank stocks down 24 percent last week, the worst slide in at least 19 years.

Congress will send Obama an economic stimulus package the day he takes office Jan. 20, Democratic lawmakers said. Senator Charles Schumer of New York said on ABC’s “This Week” program that the package will be between $500 billion and $700 billion.

Home Depot, the world’s largest home-improvement retailer, gained $2.13 to $21.42. General Electric, the world’s biggest maker of power-generation equipment, added $1.23 to $15.26.

Energy Rally

Energy companies in the S&P 500 climbed 6.1 percent collectively as oil rallied 9.2 percent to $54.50 a barrel in New York as the rescue of Citigroup boosted confidence and a weaker dollar enhanced the appeal of commodities.

Exxon Mobil Corp., the country’s largest oil company, advanced 3.9 percent to $78.80. Chevron Corp., the second- biggest, rose 5.4 percent to $74.30.

General Motors Corp., the automaker in danger of running out of cash this year, will seek to negotiate a cut in debt levels and new union work rules to help boost its chances of winning federal loans, people familiar with the plan said. The shares gained 17 percent to $3.59.

Apple Gains

Apple Inc. increased 13 percent to $92.95. The maker of Macintosh computers and iPod music players had its fiscal 2009 profit estimate boosted 7.3 percent at JPMorgan, which said sales growth for notebook computers is accelerating.

Manitowoc Co. rose 28 percent to $6.18. Rutherford Investment Management President William Rutherford told Business Week magazine that the maker of construction cranes should benefit from an increase in infrastructure spending under Obama.

Campbell Soup Co. fell 7.6 percent to $33.52 for the biggest drop in the S&P 500. The world’s largest soupmaker reported first-quarter sales that trailed analysts’ average estimate by 2.6 percent, according to Bloomberg data. Full-year revenue and profit may be hurt by 5 percentage points because of the dollar’s gain against other currencies, the company said.

Daily swings of 3 percent or more in the S&P 500 have became the norm as the benchmark gauge of U.S. equities extended losses in its worst year since 1931. During the first nine months of 2008, the index moved at least 3 percent on 14, or 7.4 percent, of the 189 trading days, and there were only two days when it gained or lost more than 5 percent.

Autumn Swings

In October, the index rose or fell at least 3 percent 13 times, more than half of the 23 trading days during the month, including six moves of at least 5 percent. This month, the S&P 500 moved at least 3 percent on 10 of the 16 trading days, including eight moves of at least 5 percent.

Only November 1929 overshadowed October 2008 as the most volatile month for the index, according to S&P analyst Howard Silverblatt, citing moves of at least 1 percent on 86 percent of last month’s trading days.

Investors are paying $9.24 per dollar of operating profit forecast in 2009 for S&P 500 companies, half the two-decade median of $18.10, data compiled by Bloomberg show. Stock valuations suggest S&P 500 profits may decrease as much as 42 percent next year amid forecasts for the worst recession in more than two decades.

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

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Natural Gas Rises on Lower Temperatures, Citigroup Rescue Plan

By Reg Curren

Nov. 24 (Bloomberg) -- Natural gas in New York rose the most in two weeks as lower temperatures forecast this week for most of the U.S. will boost demand for the heating fuel.

Colder-than-normal weather is probable starting Nov. 29 and lasting through Dec. 3, according to the U.S. Climate Prediction Center in Camp Springs, Maryland. About 52 percent of U.S. households rely on gas for heat. Prices also gained along with world stock markets on speculation a rescue package for Citigroup Inc. will help aid an economic recovery.

“The long-range forecast I see out there is fairly cold,” said Michael Rose, a director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida. “Given the fact equities are higher we are off to the races and, based on fundamentals, we should be.”

Natural gas for December delivery rose 40.8 cents, or 6.3 percent, to settle at $6.888 per million British thermal units at 2:59 p.m. on the New York Mercantile Exchange, the biggest one- day gain since Nov. 10. The December contract expired today.

The more active January futures rose 32.4 cents, or 5 percent, to $6.827 per million Btu.

Citigroup, facing the threat of a breakup or sale, received $306 billion of U.S. government guarantees to protect the bank from losses on assets including home loans, commercial mortgages and subprime bonds. Citigroup stock fell 60 percent last week.

“In order for risk capital to be put to work, everything else needs to be in semi-order,” Rose said. “Gas likes the fact that there is help being thrown at the equity market.”

Low Temperatures

Cold weather is expected to persist through the first half of December, said Joe Bastardi, a meteorologist at AccuWeather.com in State College, Pennsylvania.

“The cold will encompass much of the nation from the interior Southwest through the East,” Bastardi said in an outlook today.

Lower temperatures probably reduced stockpiles of gas last week, which reached 3.488 trillion cubic feet in the week ended Nov. 14, Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York, said in a note.

“Cold weather continues to buoy gas prices, despite ample storage,” he said.

The Energy Department will report its weekly stockpiles on Nov. 26, a day earlier than usual, because of the U.S. Thanksgiving holiday.

“We have cold weather forecast for the next two weeks and the government is riding to town with a big bag of money and today, anyway, the world is a better place,” said David Pursell, managing director of Tudor Pickering Holt Co. in Houston. “Gas is trading along with that.”

Supply Report

Analysts and speculators will be watching to see whether lower temperatures will increase demand after stockpiles unexpectedly rose 16 billion cubic feet in the week ended Nov. 14, Pursell said.

Supplies probably fell 45 billion cubic feet in the week ended Nov. 21, based on the median of five analyst estimates compiled by Bloomberg. The average change for the week over the past five years is a decline of 14 billion cubic feet.

Natural gas “should be a bellwether for the rest of the energy complex,” said William Adams, a managing director at JKV Global in Chicago. “It should take the lead for the remainder of the fourth quarter.”

To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.

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Gold Rises to 5-Week High as Dollar Weakens; Silver Advances

By Pham-Duy Nguyen

Nov. 24 (Bloomberg) -- Gold rose to a five-week high as the dollar weakened, boosting the appeal of the precious metal as an alternative investment. Silver and platinum also gained.

The dollar fell as much as 2.6 percent against a weighted basket of six major currencies. Gold and other metals often move in the opposite direction of the U.S. currency. Gold still is down 2.2 percent this year, while the dollar rallied 12 percent.

“The dollar is getting its teeth kicked in,” said Matt Zeman, a metals trader at LaSalle Futures Group Inc. in Chicago. “You have big money flowing back into gold. The risk appetite is returning, and the dollar is getting decimated.”

Gold futures for December delivery rose $27.70, or 3.5 percent, to $819.50 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price reached $830.10, the highest since Oct. 16.

Silver futures for March delivery jumped 87.3 cents, or 9.2 percent, to $10.378 an ounce on the Comex.

Platinum futures for January delivery gained $40.70, or 4.9 percent, to $866.40 an ounce on Nymex. Palladium for March delivery rose $16.65, or 9.2 percent, to $196.90 an ounce, the biggest gain since Feb. 19.

The dollar fell after Citigroup Inc. got $306 billion in U.S. government guarantees for troubled assets, reducing demand for the greenback. The collapse of Lehman Brothers Holdings Inc. in September triggered a $700 billion U.S. government bailout for banks.

Dollar Weakness

“Gold is up on the weakness of the dollar,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “The overall impact of what the bailout is going to cost will ultimately become very negative for the dollar. All this money that ran into Treasuries with no yield, and the government still has to go out and borrow money.”

The U.S. Treasury is on course to borrow $1.5 trillion this year. The Federal Reserve cut its benchmark interest rate to 1 percent from 5.25 percent in September 2007.

Since Lehman collapsed, gold has traded as high as $936.30 on Oct. 10 and as low as $681 on Oct. 24. Some investors sold gold to raise cash and cover losses in other markets as the Standard & Poor’s 500 Index dropped 46 percent this year before today. The gauge rebounded as much as 5.2 percent today.

“A rally was overdue because gold was so undervalued,” McGhee said. “As the stock market finds some stability, all the things that were thrown out with the bathwater, like gold, will come back.”

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

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Chavez Loses Biggest States on Defections by Venezuela’s Poor

By Matthew Walter and Daniel Cancel

Nov. 24 (Bloomberg) -- Venezuelan President Hugo Chavez suffered his second electoral setback in two years as the urban poor defected from his socialist party to help elect opposition candidates in Caracas and the three biggest states.

Chavez’s Venezuelan United Socialist Party, or PSUV, lost races for governor in five states yesterday, according to the National Elections Board, and in the country’s two biggest cities. The president, whose candidates captured 21 of 23 states in 2004, won in 17 states.

“In the short term it’s a draw but in the long term it’s a win for the opposition,” said Shannon O’Neil, a Douglas Dillon fellow at the Council on Foreign Relations in New York. “They did incredibly well given the adverse conditions, and it means they’ll be governing almost half of the population.”

The opposition, which has been largely powerless since Chavez’s party nearly swept the last round of regional elections and won almost every seat in congress in 2005, gained platforms in the country’s political and economic centers it can use to try to slow his drive to centralize control.

While Chavez remains personally popular among poor voters, mostly in rural areas, some are starting to question his socialist political agenda as inflation accelerates, crime spirals out of control and oil prices sink.

Changing Rules

Last year, the country narrowly rejected his proposal to eliminate presidential term limits in a national referendum on constitutional amendments. Yesterday’s losses may limit Chavez’s chance to make a second run at changing rules that will end his presidency in 2013, said O’Neil.

Turnout among the country’s 16.9 million registered voters was 65.5 percent yesterday as candidates vied for 603 posts, including 22 of the country’s 23 state governors and 326 mayors.

Opposition candidates beat Chavez’s party in the oil- producing state of Zulia, the country’s most populous state, as well as the industrialized Carabobo state and Miranda, Nueva Esparta and Tachira states, according to the National Elections Board.

In city races, the opposition won in Maracaibo, the second- biggest city, and in Sucre, a municipality in greater Caracas that includes one of the biggest slums in Latin America. The PSUV’s loss in Sucre suggests Chavez’s core supporters are beginning to sour on his policies.

Chavez Test

Chavez had called yesterday’s elections a test of support for his presidency, and campaigned almost daily over the past month for his party’s candidates to head off a loss like the national referendum last December, his first electoral defeat since taking office in 1999.

Chavez said that his party’s victories in a majority of states show he is still supported by most of Venezuela’s 28 million people. Most of the states that supported his candidates are rural and sparsely populated. Of the 17 states he won, 13 have a population of less than 1 million.

“I recognize the adversary’s triumph,” he said in comments broadcast by state television. “Of course we would have liked to win every governorship, but this was a great victory.”

The opposition gains set the stage for increased conflict with the president. In his speech early this morning, Chavez said he wouldn’t yield to the opposition.

‘Path Toward Socialism’

“We’ve won 17 governorships. We won governorships with margins of up to 60 points,” he said. “What they are telling me is that we should stay on the same path toward socialism.”

During the election campaign this year, Chavez threatened to suspend funding for development projects where opposition candidates win, and to throw candidate Manuel Rosales, who was elected mayor of Maracaibo, in jail on charges of corruption.

“The worst scenario is something like Bolivia, where Chavez simply decides to mistreat the political leadership that gets elected from the opposition and increase the level of confrontation,” said Javier Corrales, associate professor of political science at Amherst College. “He has threatened to use not just economic strangulation but also carry out military plans against these leaderships.”

Chavez regularly accuses opposition parties of trying to overthrow him, and he survived a brief coup in 2002 and a national strike that ended in 2003.

Crime Control

Caracas mayor-elect, Antonio Ledezma said he’ll make crime control a priority in the city, where the homicide rate jumped to 130 per 100,000 people last year, a 47 percent increase from 2005, according to data compiled by the Central University of Venezuela’s Center for Peace.

Henrique Capriles Radonski, the opposition governor-elect in Miranda state, said he’s willing to work with Chavez

“The government should know that we didn’t come to argue, but to work,” he said.

Chavez may respond to the losses by invoking powers he decreed for himself earlier this year that allow him to carve existing jurisdictions into federally controlled territories, making existing governors powerless figure heads.

“The reality is that the government has already managed to weaken substantially local offices by approving controversial bills that concentrate power at the executive government level,” Goldman Sachs Group Inc. economist Alberto Ramos wrote today in a note to investors.

To contact the reporter on this story: Matthew Walter in Caracas at mwalter4@bloomberg.net; Daniel Cancel in Caracas at dcancel@bloomberg.net.

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NRG Tells Shareholders to Spurn Exelon $6 Billion Bid

By Jim Polson

Nov. 24 (Bloomberg) -- NRG Energy Inc. urged its shareholders to reject a hostile $6 billion takeover offer from Exelon Corp. that would create the largest U.S. power producer.

“A combination with Exelon will dilute and might derail NRG’s growth,” Princeton, New Jersey-based NRG said today in a filing with the U.S. Securities and Exchange Commission. NRG currently is the second-largest power producer in Texas, behind closely held Energy Future Holdings Corp.

Exelon offered 0.485 of a share for each NRG share directly to holders on Nov. 12 after the power producer’s board turned down an identical offer Nov. 9 as too cheap and potentially risky for investors. NRG was required to respond to the offer within 10 business days under U.S. securities rules.

“The price is the same, so the answer is the same,” NRG Chief Operating Officer Robert C. Flexon said today in an interview.

Talks between the companies, initiated by JPMorgan Chase & Co. on Sept. 24, fell apart Sept. 30 at a meeting in New York when Exelon Chief Executive Officer John W. Rowe refused to discuss an exchange ratio of Exelon shares for those of NRG, according to the filing.

Today’s regulatory filing clears the way for NRG management meetings on the bid with individual shareholders. Exelon senior executives found NRG shareholders and bondholders “supportive” of the offer, Executive Vice President Ruth Ann Gillis said in a Nov. 20 interview.

“Our shareholders have widely supported us,” Flexon said. “They realize this exchange ratio vastly undervalues NRG.”

Exelon has told investors its goal is a negotiated agreement that would leave in place $4.75 billion of senior notes at NRG, reducing refinancing costs that would be required in a hostile takeover. NRG also has about $4 billion of bank debt.

Holders of NRG’s senior notes have the right to sell them back to the company at $1.01 for each $1 of principal upon change of control at the company. Exelon wants NRG to agree to a merger it says would avoid triggering that provision, according to its filing.

The filing was made after regular trading closed on U.S. markets. Exelon rose $3.11, or 6.2 percent, to $53.11 in New York Stock Exchange composite trading. That raised the value of its offer to $25.76 a share. NRG rose $2, or 11 percent, to $21.

Proxy Fight

Exelon is prepared to take a proxy battle to NRG’s annual shareholders meeting next year if Chief Executive Officer David Crane and his board refuse talks, Gillis said. Exelon is the largest U.S. producer of nuclear power with 17 reactors and owns utilities in Illinois and Pennsylvania.

“They’ve never really adequately explained to my mind why they are doing this,” Jim Halloran, who manages about $34 billion at National City Private Client Group in Cleveland. Exelon is among his top holdings at 1.12 million shares. “I’ve never seen a rationale of why this makes sense.”

Halloran, interviewed before NRG’s announcement, said he’d not been courted by either company.

The exchange offer is scheduled to expire Jan. 6 at 5 p.m. New York time, after which Exelon must report how many shareholders accepted it. The offer can be extended.

“I would find very surprising if NRG went back to Exelon after taking such a hard line,” Gordon Howald, an energy analyst with Calyon Securities in New York, said in an interview before the announcement.

NRG owns 44 percent of the South Texas Project nuclear plant, as well as power stations that burn Wyoming coal and Texas lignite, cheap fuels in a state where natural gas tends to dictate electricity prices.

The combined company could save $180 million to $300 million a year, Gillis said.

NRG rejected that argument Nov. 9, saying refinancing its debt would “waste” as much as $500 million a year.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.

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