July 23 (Bloomberg) -- Holy cow. Bank of America Corp.'s second-quarter profit dropped only 41 percent. Only.

That was just the kind of news investors had been waiting for. In the two days since the earnings report, the bank's shares have gained 18 percent and yesterday's close of $32.35 was a 75 percent jump from $18.52 on July 15.

It mattered little that Bank of America, which is the biggest U.S. holder of home mortgages, set aside $5.8 billion for future bad debts in the quarter, more than triple the amount in the year-earlier period. People preferred to see that the bad- debt provision was 3 percent less than in the first quarter.

Citigroup Inc., whose widely diversified empire seemed to be disintegrating, last week also attracted a legion of new supporters when it reported a second-quarter loss of only $2.5 billion. Only. The consensus of analysts was that the loss would be $3.7 billion. Citigroup shares have risen 16 percent since.

This less-bad-news-is-good-news notion of investing has triggered a rally in financial stocks. A Standard & Poor's index of 29 companies -- including lenders, Wall Street firms and money managers -- has jumped 31 percent since July 15.

Lehman Brothers Holdings Inc., whose ability to pay its debts has been cast into doubt by analysts, has climbed to $20.20 from $13.22 on July 15.

Fannie Mae and Freddie Mac, which keep the mortgage market liquid by purchasing loans from lenders, have bounced back even though each is losing billions and struggling to maintain capital. Shares of Fannie Mae have doubled since July 11. Freddie Mac stock has risen to $9.70 from an intraday low of $3.89 on that same date.

Statistics Can Lie

Percentage gains from this mini-rally are misleading, of course. Bank of America shares are still down 39 percent from $52.96 last October -- and the recent gain is off a 12-year low.

Citigroup stock is down 59 percent since trading at $50.86 a year ago. On July 23 last year, Lehman shares traded at $68.85.

Today's math problem: How many times does Lehman stock have to repeat its recent 68 percent gain to make up for its 83 percent decline prior to that?

Downtrodden financials are making progress of a sort. Bank of America's second-quarter revenue was a record $20.6 billion. The company said the newly acquired Countrywide Financial Corp. will become profitable this year even with its huge current mortgage losses.

Kenneth Lewis, Bank of America's chief executive officer, said the bank will keep its dividend, which now yields 7.9 percent on its stock price. Citigroup has cut its dividend, and Wachovia Corp., reeling from mortgage losses, yesterday lowered its payout for the second time this year.

Bad Though Better

Citigroup said its second-quarter writedowns related to subprime mortgages, leveraged loans and bond-insurance contracts declined to $7.2 billion. A whopping number, but better than the $12 billion charged in the first quarter and $18 billion in the fourth quarter last year.

Lehman Brothers reduced its mortgage holdings by 20 percent in the quarter ended in May.

The U.S. Congress is considering a proposal for standby government lending authority to Fannie Mae and Freddie Mac and possible stock investment in the companies.

Bill Gross, who manages the $129 billion Total Return Fund at Pacific Investment Management Co., says bonds of Bank of America; Wells Fargo & Co., the second-biggest U.S. mortgage company; and JPMorgan Chase & Co. look good now. The fund is loaded up with mortgage securities backed by Fannie Mae.

It could be that the worst is over for financial stocks and the broad market -- and that investors have been picking up bargains. Or it might be a short-term rally during a long-term descent.

(David Pauly is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: David Pauly in Normandy Beach, New Jersey, at dpauly@bloomberg.net

Last Updated: July 23, 2008 03:33 EDT