Bloomberg News

Most U.S. Stocks Gain, Led by Banks, as Euro, Commodities Drop

January 12, 2012

Jan. 11 (Bloomberg) -- Most U.S. stocks rose and the Standard & Poor’s 500 Index reached a five-month high for a second day as gains in banking and technology shares helped the market recover from an early slump spurred by growing signs Europe may slip into a recession. Commodities and the euro fell.

The S&P 500 closed up less than 0.1 percent at 1,292.48 at 4 p.m. in New York as about three stocks advanced for every two that fell on U.S. exchanges. The Dow Jones Industrial Average slipped 13.02 points to 12,449.45. Treasuries rose, sending the rate on the 10-year note down six basis points to 1.91 percent, after an auction drew a record low yield. Natural gas tumbled to a 28-month low to lead a drop in commodities. The euro lost 0.6 percent to $1.2707 even as Spanish and Italian bonds increased.

Citigroup Inc. rallied 4.2 percent to lead banks higher after analyst Dick Bove said the shares could “easily” triple in five years as earnings recover. Germany’s Federal Statistics Office said the economy probably shrank in the fourth quarter from the third and three research institutes forecast in a joint report the euro-area economy contracted in the fourth quarter and will continue to decline in the first quarter.

“The U.S. economic backdrop is more favorable even as the international picture becomes murky,” Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4 billion in Raleigh, North Carolina, said in a telephone interview. “Companies most domestically-oriented, including financials, are better positioned for this environment. The fundamentals will remain challenging, but valuations are attractive.”

The Federal Reserve said that the U.S. economy improved last month across most of the country even as hiring was limited and housing remained stagnant.

Financials Rally

Financial shares in the S&P 500 rose 1 percent collectively today and contributed the most to the index’s advance. The group has rallied 6.7 percent to help lead the S&P 500’s gain in 2012 after slumping 18 percent last year for the worst drop among the 10 main groups. The group of 81 banks, insurers and investment firms trades for about 11.8 times earnings, compared with an average multiple of 16.7 over the past decade.

Citigroup rallied 4.2 percent $31.27, its highest price since November, and has climbed 19 percent this year after tumbling 44 percent in 2011.

‘Earnings Will Skyrocket’

“I think that stock should rise about 25 percent a year in each of the next five years,” Bove, analyst at Rochdale Securities LLC in Lutz, Florida, told Bloomberg Television’s Tom Keene. “That company is easily going to double and triple in price. I think its earnings will skyrocket relative to where they are at the present time. It will be a much larger institution, with a very large international presence and a very successful company.”

Bank of America Corp., which tumbled 58 percent in 2011, climbed 3.6 percent for the second-biggest gain today among the 24 stocks in the KBW Bank Index, which closed at the highest level since Aug. 3. Options traders are making the most-bullish wagers in a decade on Bank of America, betting an improving U.S. economy will spur gains in the stock after it fell the most in the Dow last year. The ratio of calls to buy the second-biggest U.S. lender compared with puts to sell jumped to 1.91 percent on Jan. 4.

JPMorgan Chase & Co. will be the second company in the Dow to release fourth-quarter results, with the largest U.S. bank scheduled to report before markets open on Jan. 13. JPMorgan has beaten analysts’ average estimate for adjusted earnings per share for 15 straight quarters and 24 of the past 25.

Earnings Season

Earnings season will accelerate next week with 48 companies in the S&P 500 reporting and six Dow members, including Bank of America Corp., Intel Corp. and General Electric Co.

Earnings have beaten analysts’ estimates for 11 straight quarters and projections of 6 percent growth in the final three months of 2011 would mark the slowest increase since the third quarter of 2009, according to data compiled by Bloomberg. Analysts predict energy companies will post 21 percent growth to lead gains, with profits climbing 7.6 percent at industrial companies and 6.8 percent at technology companies. Raw-material producers and telephone companies are forecast to show declines in earnings.

Financial companies are projected to report 3.9 percent earnings growth, with profits up 21 percent at banks and down the same amount at diversified financial firms, according to a compilation of analysts estimates.

Natural-Gas Producers Slump

Energy producers, providers of consumer staples and utilities lost at least 0.4 percent collectively to lead declines in the 10 main industry groups in the S&P 500 today. Cabot Oil & Gas Corp. tumbled 11 percent, Southwestern Energy Co. lost 8 percent and Range Resources Corp. fell 6.3 percent as forecasts for warm weather triggered a plunge in natural gas.

Goodyear Tire & Rubber Co., the largest U.S. tiremaker, dropped for a second day after slumping 8.3 percent yesterday as the company said it’s experiencing weakness in global demand with sales of replacement tires falling about 3 percent in North America in last year’s final quarter. Urban Outfitters Inc. plunged 19 percent, the most in three years, after saying Glen Senk resigned as chief executive officer.

Microsoft Corp. slipped 0.4 percent, recovering from a 1.7 percent earlier loss triggered after the world’s largest software maker said industrywide sales of personal computers will probably be lower than analysts projected in the fourth quarter because supply was hurt by flooding in Thailand. Microsoft will report results for the latest period on Jan. 19 and hasn’t missed analysts’ average forecast for adjusted earnings per share since 2009, Bloomberg data show.

Oil, Natural Gas

Oil dropped 1.3 percent to $100.87 a barrel in New York, extending declines after a U.S. government report showed inventories increased almost five times as much as expected. The S&P GSCI index of 24 commodities lost 0.7 percent. Natural-gas futures fell as much as 6.8 percent to $2.74 per million British thermal units, a 28-month low, as revised forecasts showed mild weather across much of the U.S. through late January.

Yields on two-year Treasury notes slipped one basis point to 0.23 percent and 30-year rates decreased six basis points to 2.97 percent.

The Treasury sold $21 billion of 10-year notes at a record low yield of 1.9 percent amid speculation France may lose its top credit rating as Europe’s sovereign-debt crisis worsens, bolstering the refuge appeal of U.S. government debt. French Finance Minister Francois Baroin denied market speculation that the nation had been notified by a ratings company about an imminent downgrade of France’s credit rating.

European Stocks

The Stoxx Europe 600 Index lost 0.4 percent after yesterday’s 1.8 percent rally. Repsol YPF SA, Spain’s largest oil company, tumbled 5.7 percent after selling 61 million of its own shares. Pirelli & C. SpA, Europe’s third-largest tiremaker, lost 4.5 percent after Goodyear’s update on sales at an investor conference in Detroit. Chr. Hansen Holding A/S rose 9.8 percent as Novo A/S agreed to buy a 26 percent stake in the Danish food- ingredient company.

The euro weakened against all but three of its 16 major counterparts, declining 0.5 percent versus the yen. The Dollar Index rose 0.6 percent to 81.299, snapping a two-day retreat.

Gross domestic product in the 17-nation euro region will shrink 0.2 percent in the three months through March, following a contraction of 0.3 percent in the fourth quarter of last year, research institutes Ifo, Insee and Istat forecast in a joint report. Growth will stagnate in the second quarter, the institutes forecast. A recession typically is defined as two consecutive quarters of declining GDP.

“Austerity measures don’t stimulate growth,” Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co., said in a telephone interview. “The negative aspect of some of the European countries was well known. So, if Germany did have an issue, that would be a negative,” he said.

Debt Sales

Spain auctions as much as 5 billion euros of 2015 and 2016 securities tomorrow, with Italy selling as much as 12 billion euros of bills tomorrow and as much as 4.75 billion euros of bonds in two days. The yield on the Greek two-year note tumbled 17.67 percentage points to 166.89 percent.

German Chancellor Angela Merkel said her nation is prepared to contribute more upfront capital to the permanent European rescue effort and the region’s central bank will help advise the temporary bailout fund. The ECB should ramp up euro area bond purchases to support Italy and prevent “cataclysmic” collapse of the euro, Fitch Ratings’s head of sovereign ratings, David Riley, told Reuters.

German Auction

The yield on the German five-year note fell nine basis points to 0.74 percent. The country sold 3.153 billion euros of five-year debt after receiving 8.97 billion euros of bids. Its maximum sales target was 4 billion euros. The U.K. sold 3 billion pounds ($4.6 billion) of September 2021 bonds today, while the U.S. auctions $21 billion of 10-year notes.

Ireland could be the first of three bailed-out euro area countries to return to the sovereign bond market in six to 12 months, Reiner Back, head of fixed income and currency portfolio management at Munich Re’s MEAG asset-management unit, said in Frankfurt today.

Borrowers from Indonesia to South Africa and Brazil tapped the debt markets for more than $30.6 billion so far this year, a record start for dollar-denominated bond sales by developing- nation issuers.

The MSCI Emerging Markets Index was little changed as Turkish stocks rallied 1.2 percent to lead gains, while Hungary’s BUX Index lost 1.8 percent and the forint currency slipped against 14 of 16 major peers as the European Commission said the nation faces suspension of some of its funding and possible sanctions for breaching deficit targets and for laws that may contravene European Union rules.

--With assistance from Lynn Thomasson in Hong Kong and Stephen Kirkland in London. Editors: Michael P. Regan, Jeff Sutherland

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; 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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