Wednesday, December 5, 2007

U.S. Stocks Rise, Led by Technology Shares; Intel, AIG Climb

By Michael Patterson

Dec. 5 (Bloomberg) -- U.S. stocks rose the most in a week after signs of increased productivity and a closely watched private report on employment suggested the economy will avoid a recession.

Microsoft Corp., Oracle Corp. and Intel Corp. led technology shares higher for the first time in four days on analyst reports saying demand for computers and software will increase. Freddie Mac gained as the Treasury Department agreed on an accord with lenders to stem subprime defaults by freezing rates. American International Group Inc. jumped the most in the Dow Jones Industrial Average after saying its investments linked to the housing market are ``manageable.''

The Standard & Poor's 500 Index added 22.22, or 1.5 percent, to 1,485.01, the highest in a month. The Dow average gained 196.23, or 1.5 percent, to 13,444.96. The Nasdaq Composite Index rose 46.53, or 1.8 percent, to 2,666.36. Four stocks gained for every one that fell on the New York Stock Exchange. Stocks in Asia and Europe also rose.

``Every positive report buys us a little bit more time to work through some of the problems and avoid a recession,'' said Bruce McCain, who helps oversee about $30 billion as head of strategy for the investment management unit at Key Private Bank in Cleveland.

Tech Rally

The Labor Department said worker productivity rose the most since 2003 in the third quarter while labor costs posted the biggest drop in four years. A report from ADP Employer Services showed companies last month added 189,000 jobs, more than triple the average forecast, prompting economists to raise estimates for the government's payroll report scheduled for release in two days.

Stocks also climbed on speculation the Federal Reserve will take measures to stem credit market losses beyond cutting the target rate for overnight loans between banks.

Oracle climbed $1.19, or 5.9 percent, to $21.22. A Lehman Brothers Holdings Inc. analyst predicted that demand for the world's third-largest software company's products would remain ``solid'' and advised buying the stock. Microsoft, the biggest software maker, gained $1.38 to $34.15. International Business Machines Corp., the third-largest, advanced $1.53 to $108.16.

Intel, the world's biggest chipmaker, gained 91 cents to $27.22. Thomas Weisel analyst Kevin Cassidy raised his rating on the stock to ``overweight'' and increased his 2008 profit estimate in part because of growing demand for computers from countries including Brazil, Russia, India and China.

Micron Technology Inc., the largest U.S. maker of computer- memory chips, advanced 35 cents to $8.95. Applied Materials Inc., the biggest chip-equipment manufacturer, gained 64 cents to $18.73.

Chip Prices

The DRAMexchange Index, which measures average prices of the chips, climbed 1.3 percent in the past five days, the longest winning streak since August. Prices for benchmark 512- megabit dynamic random access memory, or DRAM, rose 1.1 percent today, according to Dramexchange Technology Inc.

Seventeen of 18 semiconductor companies in the S&P 500 advanced, rising 3.1 percent as a group.

Freddie Mac, the second-biggest source of funds for U.S. home loans, rallied $2.36, or 7.3 percent, to $34.67.

Rate Freeze

Federal regulators and U.S. lenders agreed on five years as the duration of an interest-rate freeze on subprime mortgages, said a person familiar with the measure aimed at fending off a jump in foreclosures. President George W. Bush will announce the accord tomorrow after it was negotiated by officials including Treasury Secretary Henry Paulson. Paulson will hold a press conference tomorrow at 1:45 p.m. in Washington to discuss the plan, the Treasury said in a statement.

Countrywide Financial Corp., the biggest U.S. mortgage company, rose 42 cents to $10.42.

AIG jumped $2.77, or 5 percent, to $58.22. Chief Executive Officer Martin Sullivan said at an investor presentation he's ``comfortable'' with AIG's holdings amid what the company called ``extreme'' market conditions of the past two months. AIG may have to write down as much of $600 million of assets, said Joseph Cassano, president and CEO of AIG's Financial Products unit.

Stocks recovered from two days of losses that were spurred by speculation deteriorating credit markets will hurt profits at banks and brokerages. The S&P 500 has rebounded 5.5 percent from a three-month low on Nov. 26 that marked the index's first so- called correction in four years. The benchmark is still 80 points below its all-time closing high of 1,565.15 on Oct. 9.

Fed Watch

Traders pared bets that the Fed will cut its benchmark lending rate by 0.5 percentage point at the central bank's Dec. 11 policy meeting, Fed funds futures contracts indicate.

The odds of a half-percentage point cut in the Fed's target for the overnight lending rate between banks are 42 percent, down from 48 percent yesterday, futures contracts show. Futures are pricing in a 58 percent chance of a quarter-point cut to 4.25 percent.

Policy makers may also lower the discount rate -- what the Fed charges banks for short-term direct loans -- by a quarter- point more than the benchmark rate to narrow the gap between the two rates. Economists said that may spur lending by easing the stigma of borrowing at the discount rate, letting firms claim they are taking advantage of a better deal.

Productivity, a measure of employee efficiency, rose at an annual rate of 6.3 percent, up from a 2.2 percent pace in the second quarter, the Labor Department said. Labor expenses dropped at a 2 percent pace. Greater efficiency eases pressure for companies to raise prices, while lower labor costs may give the Fed leeway to reduce interest rates.

'Reasonably Good Shape'

``The economy is in reasonably good shape,'' said Malcolm Polley, who oversees about $1 billion as president of Stewart Capital Advisors in Indiana, Pennsylvania. ``We're relatively upbeat about what the market is going to hold for us.''

Mortgage applications in the U.S. jumped last week by the most in more than three years, according to the Mortgage Bankers Association, led by a surge in refinancing as long-term interest rates dropped to two-year lows.

In other economic reports, the Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of the economy, fell more than forecast to 54.1 from 55.8 the prior month. Orders at U.S. factories unexpectedly rose in October, posting the biggest gain since July, the Commerce Department said.

Economists at Goldman Sachs Group Inc. said U.S. economic growth will fall to 1.8 percent next year from 2.1 percent this year. The U.S. slowdown will hurt other economies, Goldman said. Of the 38 countries they monitor, Goldman economists expect 26 to slow next year and 12 to strengthen, causing global growth to slow to 4 percent in 2008 from 4.7 percent this year.

Fed Rally

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said the Fed may have to reduce its benchmark interest rate to 3 percent or lower to support the economy.

The S&P 500 has climbed 15 percent on average during the dozen times the Fed reduced interest rates during the past 50 years, according to research published yesterday by Bespoke Investment Group LLC. During the two Fed easing cycles in which the benchmark rate fell to a low of 3 percent -- a three-month period that ended in September 1960 and a three-year period ended in September 1992 -- the S&P 500 advanced 2.2 percent and 30 percent, respectively, Bespoke found.

Thomas H. Lee Partners LP raised $8.1 billion for leveraged buyouts, a sign that investors expect LBOs to rebound after financing for the biggest deals dried up. The fund will focus on North American companies, said two people with knowledge of the plan. There have been four LBOs valued at more than $5 billion since June 30, down from 19 in the first six months of the year, according to data compiled by Bloomberg.

MBIA, Comcast

MBIA Inc. dropped $5.21, or 16 percent, to $27.42 for the biggest decline in the S&P 500 and the stock's steepest drop in 20 years. Moody's said the largest bond insurer may face a capital shortfall, throwing its AAA credit rating in jeopardy and putting at risk the rankings of the state, municipal and corporate debt it guarantees. Liz James, a spokeswoman for MBIA, said the company had no immediate comment.

Comcast Corp. fell $2.55, or 12 percent, to $18.18 for the second-largest retreat in the S&P 500. The biggest U.S. cable- television provider reduced its 2007 forecasts for sales, new customers and cash flow.

The Russell 2000 Index, a benchmark for companies with a median market value of $597.4 million, today climbed 1.8 percent to 765.64. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, increased 1.4 percent to 14,963.52. Based on its advance, the value of stocks increased by $264.2 billion.

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