U.S. Stocks Rally on Microsoft Profit, Countrywide Forecast

Oct. 26 (Bloomberg) -- U.S. stocks rallied after Microsoft Corp. and Countrywide Financial Corp. reassured investors that profits will extend five years of growth.

The Standard & Poor's 500 index posted its sixth increase in seven weeks after 65 percent of 301 members reported quarterly earnings that topped analysts' forecasts. Profits may grow 7 percent in 2007 and 12.3 percent in 2008, based on the average analyst estimate from a Bloomberg survey.

Microsoft, the world's biggest software company, climbed 9.5 percent to a six-year high after quarterly sales beat projections by more than $1 billion. Countrywide, the largest U.S. mortgage lender, had the biggest gain since at least 1982 after saying last quarter was its ``earnings trough.'' Merrill Lynch & Co. rose the most in five years on speculation its chief executive will be ousted.

The S&P 500 climbed 20.88, or 1.4 percent, to 1,535.28, its steepest advance this month. The Dow Jones Industrial Average gained 134.78, or 1 percent, to 13,806.7. The Nasdaq Composite Index jumped 53.33, or 1.9 percent, to 2,804.19.

``The U.S. stock market today is probably the best asset in the world,'' said Stanley Nabi, who helps oversee about $8.5 billion at Silvercrest Asset Management in New York. ``Earnings will be flat for the third quarter compared to last year. However, they're not falling off a cliff.''

S&P 500 members have reported a 0.8 percent drop in third-quarter earnings on average, according to analysts' estimates compiled by Bloomberg. Analysts on average expect profits to decline 1.6 percent for the quarter, the first drop since 2002. Excluding financial companies, profits have risen 11 percent so far, compared with a forecast increase of 4.8 percent.

Microsoft Rally

Microsoft rose $3.04 to $35.03, pushing software companies in the S&P 500 to a 4.1 percent gain, the steepest advance since April 2003. Net income increased 23 percent to $4.29 billion, or 45 cents a share, beating the 39-cent average in a survey by Bloomberg. Sales advanced 27 percent to $13.8 billion. Earnings this year may be as high as $1.81 a share, exceeding the average forecast of $1.73.

The S&P 500 gained 2.3 percent this week, erasing more than half of last week's decline. The Dow added 2.1 percent, while the Nasdaq climbed 2.9 percent.

Countrywide surged $4.23, or 32 percent, to $17.30. The company predicted a return to profit in the fourth quarter and for 2008 after its first quarterly loss in 25 years. ``Prospects for the U.S. housing and mortgage markets, as well as for Countrywide, remain very attractive,'' President David Sambol said.

``You've had bad news from financials for the last few weeks and then Countrywide comes out and says they can fix their business,'' said Rick Campagna, who helps manage $3 billion at Provident Investment Counsel in Pasadena, California. ``They're the center of the storm, so when they say they're going to survive and do well, it gives you a cushion for everyone else.''

The S&P 500 Thrifts & Mortgage Finance Index rose 6.1 percent for its first daily advance in three weeks.

Merrill Gains

Merrill, the largest U.S. brokerage, advanced $5.19 to $66.09. Chairman and Chief Executive Stanley O'Neal discussed a possible merger with Wachovia Corp. without first obtaining the approval of Merrill's board, the New York Times reported, citing people with knowledge of the matter.

The shares gained after Deutsche Bank Securities analyst Mike Mayo said the company might fetch $100 to $120 a share in a takeover. CNBC reported O'Neal privately conceded to friends and family that he will probably be fired by the end of the weekend, without citing anyone specific.

``We don't comment on rumors,'' said Merrill spokeswoman Jessica Oppenheim.

Financial shares in the S&P 500 climbed 2.5 percent, the steepest advance among 10 industry groups. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage-backed securities, rose $3.50 to $60.42. Bear Stearns Cos., the second-biggest, added $5.16 to $116.21. Goldman Sachs Group Inc., the most profitable securities firm, increased $9.26 to $235.92.

Tesoro Corp. rose the most since December 2002, climbing $7.28, or 13 percent, to $64.48. Kirk Kerkorian's Tracinda Corp. said it will make a tender offer for 16 percent of Tesoro's shares at $64 each.

Wal-Mart Stores Inc., the world's biggest retailer, advanced 76 cents to $44.64. Merrill analysts raised their recommendation on the shares to ``neutral'' from ``sell.'' It was the company's only ``sell'' rating, according to data compiled by Bloomberg.

MEMC Electronic Material Inc. jumped $11.78 to a record $71.08. The world's third-largest maker of silicon wafers reported profit that topped analysts' estimates after signing new supply contracts.

U.S. stocks fell for a second day yesterday, led by American International Group Inc. and Merrill Lynch on concern financial companies face more credit-market losses stemming from subprime loans.

Oil Rises Above $92

Valero Energy Corp., the largest U.S. refiner, climbed $1.02 to $73.13 after crude oil rose above $92 a barrel for the first time in New York.

The dollar fell to a record low against the euro on signs that climbing oil prices and the housing slump will cause the Federal Reserve to cut interest rates again. Gold rose to the highest since 1980, closing at $787.50 an ounce in New York.

The odds that the Fed will lower its target for the overnight lending rate between banks by 0.25 percentage point to 4.50 percent at its Oct. 31 policy meeting are 92 percent, futures contracts show.

A report today showed confidence among U.S. consumers declined more than forecast in October. The Reuters/University of Michigan final sentiment index dropped to 80.9, the lowest level since May 2006, from 83.4 in September.

More than 11 stocks gained for every three that fell on the New York Stock Exchange. Some 1.4 billion shares changed hands on the NYSE, 12 percent less than the three-month daily average.

Vonage, Waste Management

Vonage Holdings Corp. surged the most in three weeks, gaining 60 cents, or 39 percent, to $2.13. The Internet phone service provider agreed to pay as much as $120 million to settle a patent-infringement lawsuit with Verizon Communications Inc., the second-biggest U.S. phone company.

Waste Management Inc. declined $3.02, or 7.7 percent, to $36.01. North America's largest trash-hauler had the steepest drop in the S&P 500 after reporting profits that missed the average analyst estimate from a Bloomberg survey as higher fuel costs and a labor strike sapped earnings.

Franklin Resources Inc. lost $6.66 to $131.98. The mutual fund manger was cut to ``market perform'' from ``outperform'' by Friedman, Billings, Ramsey Group Inc. on expectations costs connected to non-U.S. clients will erode profit.

The Russell 2000 Index, a benchmark for companies with a median market value of $652 million, gained 1.9 percent to 821.39. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, advanced 1.4 percent to 15,518.12. Based on its rise, the value of stocks increased by $259 billion.

American International Group Inc. (AIG US)
Bear Stearns Cos. (BSC US)
Countrywide Financial Corp. (CFC US)
Franklin Resources Inc. (BEN US)
Goldman Sachs Group Inc. (GS US)
Lehman Brothers Holdings Inc. (LEH US)
MEMC Electronic Material Inc. (WFR US)
Merrill Lynch & Co. (MER US)
Microsoft Corp. (MSFT US)
Tesoro Corp. (TSO US)
Valero Energy Corp. (VLO US)
Vonage Holdings Corp. (VG US)
Wal-Mart Stores Inc. (WMT US)
Waste Management Inc. (WMI US)

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net