U.S. Stocks Advance as Microsoft, Apple Allay Recession Concern

By Eric Martin

Oct. 27 (Bloomberg) -- U.S. stocks advanced for the sixth time in seven weeks after earnings from Microsoft Corp. and Apple Inc. bolstered speculation that the economy is growing enough to sustain profits.

Microsoft shares soared to the highest since July 2001 after Windows Vista and the ``Halo 3'' video game helped the world's largest software maker report higher-than-expected sales. Apple gained after profit increased more than analysts estimated, propelled by record Macintosh computer sales and rising demand for iPods and iPhones.

``The earnings were very, very good,'' said Richard Sichel, who helps manage about $1.5 billion as chief investment officer at Philadelphia Trust Co. in Philadelphia. ``Technology earnings have offset, to some extent, the financial worries that continue.''

Computer-related companies in the Standard & Poor's 500 Index increased profit by 11 percent last quarter, according to a Bloomberg analysis of reported results. Analysts forecast 9 percent growth three weeks ago. S&P 500 members that have released results so far posted a 0.8 percent decline in profit.

The S&P 500 gained 2.3 percent this week to 1,535.28. The Dow Jones Industrial Average climbed 2.1 percent to 13,806.70. The Nasdaq Composite Index rose 2.9 percent to 2,804.19.

25 Years

The market recovered from the steepest weekly drop since July, a decline caused by speculation the housing slump's toll on the economy and earnings at banks and brokerages had deepened. Countrywide Financial Corp. fueled gains after the largest U.S. mortgage lender said profit will rebound from its first quarterly loss in 25 years. Yesterday, Countrywide shares surged the most since at least 1982.

Yields on U.S. Treasury two-year notes fell for the second- straight week, slipping 0.01 point to 3.78 percent, on speculation the Federal Reserve will cut borrowing costs next week to support the economy. The 10-year note's yield increased 0.01 point to 4.40 percent.

Trading in futures contracts implies 92 percent odds that Fed policy makers will reduce their benchmark lending rate by 0.25 point to 4.50 percent on Oct. 31. They shifted from 5.25 percent last month.

Microsoft soared 16 percent, the most for a week since October 2000, to $35.03. That helped a gauge of software companies in the S&P 500 advance 7.2 percent, the biggest rally in five years.

Vista, Halo 3

Microsoft's fiscal first-quarter sales beat the average analyst estimate by $1 billion. The company lured customers to pricier versions of Vista and won new Xbox users with ``Halo 3,'' allaying concern that growth depends on cracking Google Inc.'s dominance in Internet advertising.

Apple gained 8.4 percent to $184.70. Fourth-quarter profit jumped 67 percent to $1.01 a share, beating the 85-cent average analyst estimate. Apple's forecast for sales and profit this quarter also beat predictions. Annual sales increased to $24 billion, exceeding $20 billion for the first time in Apple's 31- year history.

Countrywide surged 14 percent to $17.30. The company that provides one out of every five U.S. mortgages plans to cut jobs and tighten lending standards, allowing it to earn 25 cents to 75 cents a share in the fourth quarter and return to profitability next year, the company said.

Merrill Lynch & Co. lost 17 cents to $66.09 after the shares fell the most in one day since April 2002, then jumped the most for one day in five years at week's end.

93-Year History

The brokerage reported the biggest quarterly loss in its 93-year history on $8.4 billion of writedowns. Two days later, the shares rallied on speculation Chairman and Chief Executive Officer Stan O'Neal will be ousted and Merrill will become a takeover target.

``It will be an extended period of price adjustment, unfortunately, for many of the financial stocks,'' said John Carey, a portfolio manager at Pioneer Investment Management in Boston, which manages about $70 billion in U.S. assets. ``We're going to see many more write-offs over the next couple of quarters.''

Tesoro Corp. surged 25 percent to $64.48, the steepest gain in the S&P 500. Kirk Kerkorian's Tracinda Corp. plans a $1.4 billion tender offer to acquire a 16 percent stake in Tesoro, a U.S. refiner whose profit jumped 10-fold in the past four years as gasoline demand and prices climbed.

Crude oil rose above $92 a barrel for the first time in New York this week after the U.S. accused Iran's military of supporting terrorism and announced new sanctions on the country that has the world's second-biggest oil reserves.

Biggest Oil Company

Exxon, the world's biggest oil company, rose 0.1 percent to $92.21. Exxon and two other members of the Dow average, Procter & Gamble Co. and Verizon Communications Inc., release quarterly results next week.

Smaller employment gains and slower growth signal the two- year U.S. housing slump is reverberating through the economy, economists said before economic reports next week.

Employers added 80,000 workers to payrolls this month following an increase of 110,000 in September, based on the median forecast in a Bloomberg News survey of economists before a Nov. 2 government report. Figures two days earlier may show the economy expanded at a slower pace in the third quarter.