U.S. Stocks Rally on Goldman, Lehman Earnings, Fed Rate Cut

U.S. stocks rallied the most in five years as earnings from Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc. allayed concern investment banks are collapsing and the Federal Reserve cut its benchmark rate.

Lehman, the fourth-biggest securities firm, had its steepest advance ever and helped lead financial stocks to their biggest gain since 2000. Goldman, the largest securities firm, rallied the most in almost nine years. All 10 industry groups in the Standard & Poor's 500 Index added at least 1.7 percent after the Fed cut the target rate for overnight lending by 0.75 percentage point, helping the market erase a two-day tumble that wiped out $767 billion following Bear Stearns Cos.'s collapse.

The run on the investment banks would appear to be over, said Doug Peta, a New York-based market strategist at J&W Seligman & Co., which oversees about $19 billion. It seems certain we are going to finish the week with the four investment banks we started with, and we couldn't be sure of that Monday morning. The Fed decision is actually a bit of a sideshow.

The S&P 500 rose 54.14 points, or 4.2 percent, to 1,330.74, its biggest rise since October 2002. The Dow Jones Industrial Average climbed 420.41, or 3.5 percent, to 12,392.66, its fourth-biggest point gain ever. The Nasdaq Composite Index increased 91.25, or 4.2 percent, to 2,268.26. Almost 16 stocks rose for every one that fell on the New York Stock Exchange, the broadest advance since September. Treasuries dropped and the dollar surged the most in nine years against the yen.

Financial shares in the S&P 500 gained 8.5 percent as a group, the top advance among 10 industries, after the better- than-forecast earnings at Lehman and Goldman assuaged concern that Wall Street firms were overvalued. The group is still down 13 percent this year after the world's largest financial firms posted $195 billion in credit losses and asset writedowns stemming from the collapse of the subprime mortgage market.

Lehman, Goldman

The Fed reduced its benchmark rate to the lowest level in more than three years. The central bank has cut the rate six times and slashed the discount rate for direct loans to banks eight times since the middle of August, when the collapse of subprime mortgages started to infect markets around the world.

Goldman surged $24.57, or 16 percent, to $175.59. Net income fell to $1.51 billion, or $3.23 a share, in the three months ended Feb. 29 from $3.2 billion, or $6.67, a year earlier, Goldman said in a statement. The average estimate of 17 analysts surveyed by Bloomberg was for $2.59 a share, with forecasts ranging from $1.95 to $3.40.

`Bad Bet'

Lehman, which lost 19 percent yesterday, climbed 46 percent today to $46.49. First-quarter net income declined to $489 million, or 81 cents a share, from $1.15 billion, or $1.96, a year earlier, the New York-based firm said. That beat the 72- cent average estimate of 16 analysts surveyed by Bloomberg. Earnings were depressed by a $1.8 billion writedown caused by the slump in the mortgage market.

Assuming Lehman will fail because Bear Stearns did is a bad bet to make, said Punk Ziegel & Co. analyst Richard Bove. While both are involved in mortgage securities, Lehman has more diversity from overseas operations, money-management businesses and high-profile deals, Bove wrote in a note to clients.

Citigroup Inc., the biggest U.S. bank, advanced $2.09 to $20.71. JPMorgan Chase & Co., the third-largest U.S. bank, gained 6 percent. Merrill Lynch & Co., the third-biggest securities firm, added 13 percent.

U.S. financial stocks are getting closer to bottoming out, analysts at Morgan Stanley said.

We view the banks as vulnerable to the credit cycle, with Fed rate cuts only a partial offset, the analysts, led by Nigel Dally, wrote in a report to clients. But some of these risks are now in the stocks.

Bear Stearns

Financial shares tumbled to their lowest level in almost five years yesterday on concern Wall Street's biggest firms may be overvalued following the $2-a-share takeover of Bear Stearns by JPMorgan.

Bear Stearns, which lost 84 percent yesterday, climbed 23 percent to $5.91 today on speculation the company may receive a higher offer. JPMorgan's $240 million bid was a 90 percent discount to Bear's closing price at the end of last week.

Getting some reinforcement that the wheels weren't falling off of all the brokers was a great thing, because everyone was fixated on the troubles at Bear, said E. William Stone, who oversees $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. It had gotten so negative that people were thinking the entire financial system might be collapsing, so anything short of that was seen as a positive.

Exxon, GM

Exxon Mobil Corp., the largest U.S. oil company, increased $2.68 to $88.47 as oil recovered some of yesterday's 4.1 percent retreat, the steepest decline since August. Chevron Corp., the second-biggest U.S. energy company, added $1.93 to $86.12.

Crude oil for April delivery rose 3.5 percent to $109.42 a barrel in New York on speculation the interest rate reduction will strengthen the economy.

General Motors Corp. climbed $1.58 to $19.41. The largest U.S. automaker has enough cash and doesn't expect any fallout from its ties to Bear Stearns, Chief Operating Officer Fritz Henderson said.

Yahoo! Inc. added $1.81, or 7 percent, to $27.66. The Internet search company that snubbed advances from Microsoft Corp. reaffirmed its forecasts for the first quarter and the year in a bid to prove it can stay independent. Cash flow may almost double in the next three years, Yahoo said.

A measure of homebuilders in the S&P indexes climbed the most in almost eight weeks, gaining 9.9 percent. Hovnanian Enterprises Inc., New Jersey's biggest homebuilder, and Standard Pacific Corp., the worst-performing stock in the index in the past year, each climbed 18 percent.

Economy Watch

Prices paid to U.S. producers rose less than forecast in February, while prices excluding food and energy jumped the most since November 2006. The 0.3 percent increase followed a 1 percent gain in January, the Labor Department said. Excluding food and energy, so-called core wholesale prices climbed 0.5 percent, more than double the gain economists forecast.

Housing starts in the U.S. dropped in February and construction permits fell to the lowest level in more than 16 years, signaling construction will continue to hurt economic growth. Builders broke ground at an annual rate of 1.065 million homes, down 0.6 percent from a revised 1.071 million pace in January that was higher than previously reported, the Commerce Department said.

The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.

Recent data show the economic outlook has weakened further while inflation remains elevated, the Federal Open Market Committee said in a statement.

Bets on Bigger Cut

Stocks rallied even though traders had priced in 86 percent odds that the Fed would cut rates by a full percentage point, according to futures trading.

This is maybe the start of the Fed trying to walk the market back from the brink and not necessarily following every single demand the market makes of it, said Joseph Veranth, who helps manage about $2.8 billion as chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin. The market's taking it very well.

The S&P 500 has dropped 9.9 percent since Sept. 17, the day before the Fed cut its benchmark lending rate for the first time in four years. The worst housing market in a quarter century and $195 billion of credit losses at the world's biggest financial firms have hindered the central bank's efforts to restore confidence in financial markets and prevent the first U.S. recession since 2001.

The Russell 2000 Index, a benchmark for companies with a median market value 22 times smaller than the S&P 500, climbed 4.8 percent to 681.93. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 4.1 percent to 13,354.94.