By Michael Patterson and Elizabeth Stanton
April 1 (Bloomberg) -- The U.S. stock market posted its best start to a second quarter in 70 years after Lehman Brothers Holdings Inc. and UBS AG said they are raising $19 billion to replenish capital, spurring speculation that banks can weather further credit losses.
Lehman rose for the first time in seven days and UBS sparked a rally in Europe on expectations that financial firms will recover from $232 billion in mortgage-related losses. The AMEX Securities Broker/Dealer Index advanced the most since March 18. General Electric Co. and United Technologies Corp. led industrial shares higher after the Institute for Supply Management's manufacturing index contracted less than forecast.
``The market's getting a little more comfortable that the crisis is over,'' said Henry Herrmann, president and chief executive officer of Waddell & Reed Financial Inc. in Overland Park, Kansas, which manages $65 billion. ``It's a rally associated with the presumed elimination of survival risk.''
The Standard & Poor's 500 Index added 47.48 points, or 3.6 percent, to 1,370.18, rebounding from the worst quarterly performance since 2002. The index hasn't gained more on the first day of the second quarter since a 4.8 percent rally in 1938. The Dow Jones Industrial Average climbed 391.47, or 3.2 percent, to 12,654.36. The Nasdaq Composite Index gained 83.65, or 3.7 percent, to 2,362.75. Almost 10 stocks advanced for every one that fell on the New York Stock Exchange.
Rebound From March Low
The S&P 500 has risen 7.6 percent from a 19-month low last month on speculation the Federal Reserve's most aggressive reduction of interest rates in two decades will stem credit- market losses and spur banks to lend to businesses and consumers. The benchmark for U.S. equities lost 9.9 percent in the first three months of 2008, the steepest quarterly decline in more than five years, on increased concern that the U.S. economy is in a recession.
Asian stocks rebounded from the worst decline in two weeks and Europe's Dow Jones Stoxx 600 Index advanced 3.3 percent. All 10 industry groups in the S&P 500 gained.
Lehman climbed $6.70 to $44.34 for the second-biggest gain in the S&P 500 after raising $4 billion from a stock sale. The firm increased the size of its offering of convertible preferred shares to 4 million from 3 million announced yesterday, saying demand ``significantly'' outpaced supply.
Broker/Dealer Rally
The cost to protect the debt of Lehman from default dropped to a one-week low. Lehman led the AMEX Securities Broker/Dealer Index to an 8.6 percent rally as all 12 members advanced. Merrill Lynch & Co., the largest U.S. brokerage, rose $5.28 to $46.02.
UBS's U.S.-traded shares gained $4.21 to $33.01. The bank will seek 15 billion Swiss francs ($15 billion) by offering shares to existing holders, on top of 13 billion francs already raised from investors in Singapore and the Middle East. UBS shares were raised to ``buy'' from ``hold'' by Deutsche Bank AG analysts.
Fannie Mae jumped $5.18, or 20 percent, to $31.50 for the biggest gain in the S&P 500. Freddie Mac advanced $3.90 to $29.22. The government-chartered mortgage finance companies also are seeing to raise capital.
Citigroup Inc., the largest U.S. bank, climbed $2.42, or 11 percent, to $23.84 for the best advance in the Dow. Bank of America Corp., the second-biggest, added $2.95 to $40.86. JPMorgan Chase & Co., the third-largest, rose $4.05 to $47.
The S&P 500 Financials Index, which had dropped 15 percent in 2008 after declining last year by the most since 1990, rallied 7.5 percent today. The gauge of 92 banks, brokers, insurers and real-estate companies has rallied more than 5 percent on four previous occasions this year.
Morgan Stanley
Morgan Stanley climbed $3.15 to $48.85. The second-biggest U.S. securities firm said its so-called liquidity reserves have averaged $125 billion in the fiscal second quarter as the company strengthened its balance sheet. Liquidity reserves include cash deposits with banks and high-quality securities that can be used as collateral.
Credit market turmoil poses the most severe crisis for banks in 30 years, surpassing Black Monday in 1987, the Asia currency crisis and the burst of the dot-com bubble, Morgan Stanley and management-consulting firm Oliver Wyman said in a joint report today.
`Bottoming Process'
``We're in this bottoming process,'' Tim Ghriskey, who oversees $2 billion as chief investment officer at Solaris Asset Management LLC in Bedford Hills, New York, said in an interview on Bloomberg Television. ``We need to have exposure to financials. There are real values out there.''
GE, the world's biggest maker of power-plant turbines, jet engines, locomotives and medical-imaging equipment, climbed $1.42 to $38.43. United Technologies, the maker of Otis elevators, added $2.42 to $71.24.
The ISM's index increased to 48.6 in March from 48.3 in February, signaling demand from overseas is sustaining manufacturing at a time when consumer spending and business investment are stagnating. Fifty is the gauge's dividing line between expansion and contraction. Economists surveyed by Bloomberg had forecast a reading of 47.5.
Motorola Inc. gained 17 cents to $9.47. Videocon Group, India's largest consumer electronics maker, may offer to buy Motorola's mobile-phone business. The closely held group is in the initial stages of evaluating a bid, Chairman Venugopal Dhoot said in a telephone interview today, declining to specify financial terms because they haven't been determined yet.
Thornburg, Clear Channel
Thornburg Mortgage Inc., the ``jumbo'' mortgage lender that's lost more than 90 percent of its value in the past year, gained 20 percent to $1.45 after raising $1.35 billion to stave off bankruptcy. The company received $1.15 billion from the sale of common stock, warrants and senior subordinated notes and will get $200 million more after the last parts of the transaction are completed.
Clear Channel Communications Inc. fell 72 cents, or 2.5 percent, to $28.50 for the second-biggest drop in the S&P 500. Six banks being sued for refusing to fund a proposed $19.5 billion buyout of the company asked a New York judge not to set a quick trial date because they want to negotiate a deal instead.
Goldcorp Inc. and Barrick Gold Corp. led miners lower as the rally in stocks curbed demand for gold as a store of value. Gold fell below $900 an ounce for the first time in six weeks. Goldcorp lost $1.29 to $37.46. Barrick Gold decreased $1.53 to $41.92.
VIX Retreats
The benchmark index for U.S. stock-option prices fell to the lowest in five weeks. The Chicago Board Options Exchange Volatility Index, a gauge of how much investors are paying for insurance against share-price declines, retreated 11 percent to 22.68. The so-called VIX, derived from prices paid for S&P 500 options, has fallen 30 percent since closing at a five-year high on March 17.
More than 1.7 billion shares were traded on the NYSE, 1.4 percent less than the three-month daily average.
The Russell 2000 Index, a benchmark for companies with a median market value that's 95 percent less than the S&P 500's, gained 3.3 percent to 710.64. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 3.4 percent to 13,786.19. Based on its advance, the value of stocks increased by $567.7 billion.
Today's rally in the S&P 500 is also tied for the sixth- best beginning to any quarter since 1928, according to Bespoke Investment Group.
The dollar rose against the euro and the yen and Treasury yields climbed as traders pared bets on additional interest-rate cuts by the Fed. The odds implied by futures contracts of a half-point cut in the target for the overnight lending rate between banks by the Fed's April 30 meeting slid to 22 percent from 52 percent yesterday. The remainder of the bets are for a quarter-point cut to 2 percent.
To contact the reporters on this story: Michael Patterson in New York at mpatterson10@bloomberg.net; Elizabeth Stanton in New York at estanton@bloomberg.net Last Updated: April 1, 2008 16:54 EDT