Bloomberg News

U.S. Stocks Rise as Dow Average Caps Biggest Gain in One Month

September 26, 2011

Sept. 26 (Bloomberg) -- U.S. stocks advanced, giving the Dow Jones Industrial Average its biggest increase in a month, amid speculation that European policy makers will act to prevent the region’s debt crisis from getting worse.

Bank of America Corp. and JPMorgan Chase & Co. rose more than 4.5 percent as the European Central Bank was said to consider restarting covered-bond purchases along with further measures to ease monetary conditions. Berkshire Hathaway Inc. Class B shares added 8.6 percent as the company plans a stock buyback. Boeing Co. rallied 4.2 percent as the delivery of the 787 Dreamliner ended more than three years of delays.

The Standard & Poor’s 500 Index added 2.3 percent to 1,162.95 at 4 p.m. in New York. The Dow average climbed 272.38 points, or 2.5 percent, to 11,043.86, rebounding from the biggest weekly decline since October 2008.

“The situation in Europe is a near-term risk, but if the global economy muddles through, you’ll probably have room for a rally in stocks," Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., said in a telephone interview. His firm oversees $3.66 trillion as the world’s largest asset manager. "There’s increased speculation that the ECB is going to cut rates. They are also searching for ways to make the existing mechanisms more robust. The market is very focused on that."

The S&P 500 is down 12 percent since June 30 and headed for the biggest quarterly slump since 2008 on concern about a global economic slowdown. Stocks were having the worst quarter on record relative to U.S. Treasuries and gold, which could force investors to buy equities to rebalance their allocations, Marko Kolanovic, the New York-based global head of equity derivatives strategy at JPMorgan, wrote in a note last week.

$1 Trillion

Last week’s rout erased $1 trillion from U.S. equities amid concern Greek insolvency is inevitable and Europe can’t contain the damage. The S&P 500 last week was trading at 12.4 times earnings in the past 12 months, 4.4 percent below its average valuation at the lowest point during the last nine bear markets, according to data compiled by Bloomberg.

“Now is the time to be bullish, not the time to panic,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $278 billion. “I don’t think we’re going into a recession. Europe will come up with something.”

ECB policy makers are likely to debate next week restarting their covered-bond purchases along with further measures to ease monetary conditions, a euro-region central bank official said.

Interest-Rate Cuts

The reintroduction of 12-month loans to banks will also be discussed at the ECB’s Oct. 6 policy meeting, said the person, who spoke on condition of anonymity because the information is confidential. Interest-rate cuts are likely to be discussed, though they are not on the current agenda, the official said. A spokesman for the Frankfurt-based ECB declined to comment.

Stocks briefly pared gains earlier after German Finance Minister Wolfgang Schaeuble said euro region governments have no intention of raising the European Financial Stability Facility’s volume above 440 billion euros. Equities rebounded after ECB Governing Council member Ewald Nowotny said there may be “good reason” to reintroduce loans with a maturity of more than six months.

“When you look at Europe, the solutions are not going to be implemented any time soon,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview. “That means the market volatility is going to continue.”

Dow Chemical, Caterpillar

The S&P 500 swung between gains and losses before rallying in the afternoon. The Morgan Stanley Cyclical Index of companies most-tied to economic growth increased 2.7 percent as Dow Chemical Co. and Caterpillar Inc. added at least 4 percent. The Dow Jones Transportation Average gained 2.2 percent. The KBW Bank Index increased 5.3 percent as all of its 24 stocks rose.

An index of financial shares had the biggest gain in the S&P 500 within 10 industries, rising 4.4 percent. Bank of America added 4.6 percent to $6.60. JPMorgan climbed 7 percent to $31.65, while Citigroup Inc. jumped 7 percent to $26.72.

Berkshire Class B shares surged 8.6 percent to $72.09. Warren Buffett’s Berkshire Hathaway will repurchase shares for as much as 110 percent of their book value, saying the stock is undervalued after falling 17 percent this year. The growth of Berkshire’s cash hoard makes it harder to effectively invest the proceeds, Buffett told investors at the company’s annual meeting in April.

‘Play Offense’

Buffett, the chief executive officer since 1970, in February touted Berkshire’s capacity to “play offense” in a crisis. He may have $20 billion at his disposal to buy shares if markets decline, said David Rolfe, chief investment officer of Berkshire investor Wedgewood Partners Inc.

“He’s laid the groundwork to swing big and hard if you wake up some morning and something nasty is going on,” said Rolfe. “He’s going to be on the phone with his broker saying, ‘Buy the shares.’”

Boeing added 4.2 percent to $62.01. The twin-engine 787 is Chicago-based Boeing’s best-selling new jet ever, with 821 orders from 56 customers. Boeing is working to boost output to 10 a month by the end of 2013, a record for wide-body aircraft, after the setbacks increased costs, sent 787 inventory ballooning to $16.2 billion through June and upset airlines’ timetables for adding new routes.

Apple Falls

Apple Inc. fell 0.3 percent to $403.17, trimming an earlier decline of as much as 3.2 percent. The company is cutting orders to vendors in the supply chain for its iPad tablet computer, JPMorgan said in a report. Several supply-chain vendors indicated in the past two weeks that Apple lowered fourth- quarter iPad orders 25 percent, the first such cut that analysts at JPMorgan’s electronic manufacturing services team in Hong Kong said they have ever seen.

Eastman Kodak Co. tumbled 27 percent, the biggest decline since January 2009, to $1.74. The camera maker drew down $160 million from its revolving bank line. The company is borrowing money after Chief Executive Officer Antonio Perez said last month that the patents Kodak is seeking to sell have generated interest from potential bidders. Kodak is trying to raise cash to continue funding inkjet printing and other digital businesses that it has projected will generate operating profits by 2013.

Stocks fell earlier today as figures from the Commerce Department showed that purchases of new houses in the U.S. declined in August to a six-month low as the biggest drop in prices in two years failed to lure buyers away from even less expensive distressed properties.

A malfunction kept the Dow from updating for 12 minutes after trading began at 9:30 a.m. New York time, a spokesman for the index’s owner said.

--Editors: Jeff Sutherland, Michael P. Regan

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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