U.S. Stocks Gain, Extending Global Rally, on ‘Bad Bank’ Plan

Jan. 28 (Bloomberg) -- U.S. stocks rose, extending a global rally, as President Barack Obama prepared to set up a so-called bad bank to absorb toxic investments and Yahoo! Inc. and Germany’s SAP AG reported better-than-estimated earnings.

Citigroup Inc. and Bank of America Corp. surged more than 16 percent after a White House official said Obama’s team may announce the outlines of its plan next week. Deutsche Bank AG and Barclays Plc added at least 19 percent in Europe, while Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank, advanced 1.2 percent. Yahoo and SAP, the largest maker of business-management software, climbed at least 6.6 percent. The dollar and yen weakened as investor appetite for risk grew.

“The impact of the bad bank idea is positive for equities in that it moves us in the direction of finding a solution to the cloud of bad assets that continue to weigh on proper valuations,” said Alan Gayle, senior investment strategist at Ridgeworth Capital Management in Richmond, Virginia, which oversees $70 billion.

The Standard & Poor’s 500 Index added 2 percent to 862.45 at 10:28 a.m. in New York, with financial companies posting the top 18 gains. The Dow Jones Industrial Average climbed 112.07 points, or 1.4 percent, to 8,286.8. Europe’s benchmark, the Dow Jones Stoxx 600 Index, jumped 2.7 percent, while the MSCI Asia Pacific Index rose 0.9 percent.

The S&P 500 yesterday capped its first three-day advance of the year. A four-day streak of gains would be the gauge’s longest since November. The index, which has dropped for three straight weeks, is still 15 percent above an 11-year low reached on Nov. 20 amid optimism that Obama’s stimulus package will revive the economy.

Stimulus, ‘Bad Bank‘

The yen and the dollar weakened on speculation U.S. efforts to support the banking system will encourage investors to buy higher-yielding currencies. Treasuries were little changed on speculation the Federal Reserve may announce measures such as buying government debt today at the end of its policy meeting.

The U.S. House is set to approve Obama’s proposed $816 billion economic stimulus package today. The plan is aimed at wresting the economy out of recession through a combination of tax cuts and $604 billion in spending.

Citigroup added 67 cents to $4.22, while Bank of America, the largest U.S. lender by assets, jumped $1.05 to $7.55. JPMorgan Chase & Co. climbed 8.7 percent to $27.25.

Financial companies in the S&P 500 rallied 9 percent collectively, with 79 of 81 companies advancing.

‘Relief Rally’

The bad-bank initiative may allow the government to rewrite some of the mortgages that underpin banks’ toxic debt, in the hope of stemming a crisis that has stripped more than 1.3 million Americans of their homes. The S&P 500 fell the most since the Great Depression last year after the collapse of Lehman Brothers Holdings Inc. froze credit markets and more than $1 trillion in losses at financial firms eroded profits.

“You’re getting a big relief rally in the financials and that’s lifting the whole market,” said Michael Binger, Minneapolis-based fund manager at Thrivent Asset Management, which oversees about $70 billion. “If the bad assets can be taken out, banks will feel more comfortable in where their capital ratios will be. And if that’s the case, they’ll be more ready to lend and the credit market freeze will thaw.”

Wells Fargo & Co., the second-biggest U.S. home lender, jumped 22 percent to $19.75. The bank maintained its dividend and said it doesn’t need more federal aid as it reported its first quarterly loss since 2001 following its acquisition of Wachovia Corp.

Earnings Watch

Yahoo, owner of the second-most-popular U.S. search engine, added 91 cents, or 8 percent, to $12.25. Excluding items such as stock-based compensation, earnings were about 18 cents a share, buoyed by job cuts and rising domestic sales. That beat the 17 cents estimated by analysts in a Bloomberg survey.

Carol Bartz, in her first earnings conference call as chief executive officer, said she would consider offers to buy the company’s assets, while adding that she didn’t come to Yahoo with the intention of selling it.

Profits decreased 41 percent for the 144 companies in the S&P 500 that have released fourth-quarter results since Jan. 12. Analysts now forecast a 32 percent drop in earnings for the fourth quarter after saying in March 2008 that net income would rise as much as 55 percent, according to Bloomberg data.

The U.S. Federal Reserve will refrain from raising interest rates from record lows when it finishes a meeting today, futures contracts on the Chicago Board of Trade indicate.

Fed Chairman Ben S. Bernanke trimmed the target for overnight lending between banks to a range of zero to 0.25 percent at the previous policy meeting on Dec. 16 to help unclog credit markets.

Deutsche Bank, Germany’s largest, surged 23 percent to 22.39 euros. Barclays, the U.K. lender that turned down government funding last year, rallied 20 percent to 107.8 pence.

In Asia, Mitsubishi UFJ increased 1.2 percent to 503 yen. KB Financial Group Inc., which controls South Korea’s biggest bank, soared 11 percent to 35,400 won.