Wall St jumps as financials rebound

NEW YORK (Reuters) - Stocks jumped on Tuesday as stronger-than-expected earnings from Goldman Sachs Group Inc's (GS.N: Quote, Profile, Research) and Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) provided some reassurance about the ailing financial sector.

All three major indexes were up close to 2 percent.

Investors also looked forward to what is expected to be a steep interest rate cut from the Federal Reserve's policy-setting committee around 2:15 p.m. on Tuesday.

Goldman and Lehman shares jumped in early trading, leading a rebound in financial stocks, which tumbled on Monday after JPMorgan Chase & Co's (JPM.N: Quote, Profile, Research) deal to buy struggling brokerage Bear Stearns (BSC.N: Quote, Profile, Research) at a rock-bottom price. A broker dealer index .XBD surged 5.9 percent.

"Today's a day for good news, with Goldman and Lehman results beating estimates. Right now the focus is that these earnings weren't as bad as they could have been," said Giri Cherukuri, head trader at OakBrook Investments LLC in Lisle, Illinois.

The Dow Jones industrial average .DJI rose 231.78 points, or 1.94 percent, to 12,204.03. The Standard & Poor's 500 Index .SPX gained 28.18 points, or 2.21 percent, to 1,304.78. The Nasdaq Composite Index .IXIC jumped 44.25 points, or 2.03 percent, to 2,221.26.

Shares of Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) rose on expectations their regulator will ease restrictions on the government-chartered companies and help them increase spending in the U.S. housing market. Fannie was up 11.8 percent at $24.86, while Freddie Mac was up 12.3 percent at $23.15.

Shares of Goldman were up 8.5 percent at $163.70 while Lehman was up 17 percent at $37.12 after reporting results that beat Wall Street estimates.

On the Nasdaq, Yahoo Inc (YHOO.O: Quote, Profile, Research) shares rose 4.7 percent to $27.07 after the Internet search company affirmed its outlook for the first quarter and full year.

Interest rate futures show investors are fully pricing in a one percentage-point cut in U.S. short-term rates, which would take the benchmark fed funds target rate down to 2 percent.

Over the weekend, the Fed made an emergency quarter-point cut to its discount rate to 3.25 percent and expanded lending to a wider range of big financial firms, in the first such move since the Great Depression of nearly 80 years ago.

Data before the opening on U.S. housing starts was stronger than expected, adding further support to the market.

Lehman Net Income Declines 57%, Less Than Estimated (Update4)

March 18 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, reported earnings that beat analysts' estimates and reassured shareholders that it has more than enough capital to survive.

Lehman surged as much as 41 percent in New York trading, erasing yesterday's record decline. First-quarter net income fell 57 percent to $489 million, or 81 cents a share, the New York- based company said in a statement today. Analysts had estimated Lehman would earn 72 cents a share.

Chief Executive Officer Richard Fuld is trying to persuade clients and creditors that Lehman will avoid the fate of Bear Stearns Cos., which ran out of cash last week and was forced to sell itself to JPMorgan Chase & Co. at a fire-sale price. Lehman had $30 billion of cash and $64 billion in assets that could easily be turned into cash as of yesterday, Chief Financial Officer Erin Callan said on a conference call with analysts.

``Surprisingly, they've taken few hits,'' said Carlos Mendez, who helps manage $14 billion at Institutional Credit Partners in New York, including credit-default swaps on Lehman debt. ``That didn't happen by mistake. That is prudent risk management.''

Earnings were depressed by a $1.8 billion writedown caused by the slump in the mortgage market. Reducing the value of those assets pushed fixed-income revenue 88 percent lower, to $262 million. Equities revenue rose 6 percent to $1.4 billion, and merger advisory fees climbed 34 percent to $330 million. Investment-management revenue jumped 39 percent to $968 million.

Revenue Declines

Total revenue fell 31 percent $3.5 billion. Return on equity, a measure of how effectively the firm invests its capital, was 8.6 percent, down from 24 percent a year earlier.

Goldman Sachs Group Inc., the world's biggest securities firm, also reported earnings that beat analysts' estimates. Profit at the New York-based firm fell 53 percent to $1.51 billion, or $3.23 a share. Analysts had predicted $2.59.

Goldman Chief Financial Officer David Viniar said he is ``totally confident'' in Lehman's ability to weather the current financial crisis.

``We think they're a very, very good firm and we think they will continue to be,'' Viniar said in an interview today. ``They're a good, healthy competitor.''

Lehman rose $12.39 to $44.14 in New York Stock Exchange composite trading at 11:34 a.m. Goldman, which fell 3.7 percent yesterday, gained 13 percent to $171.13.

Fed Plan

Mendez at Institutional Credit said securities firms' cash holdings have become less important now that the Federal Reserve has agreed to let brokers borrow from its so-called discount window directly.

``These guys can fund themselves,'' Mendez said.

Fuld, 61, has announced plans to cut 5,300 jobs, or 19 percent of the workforce, and closed mortgage units during the past seven months, initiatives designed to help Lehman grow faster than its peers once markets recover. He also has expanded in Europe and Asia to gain market share in stock trading.

The firm now ranks as the largest trader on the London Stock Exchange and Euronext. Lehman has risen to fourth from sixth on the New York Stock Exchange and Nasdaq. Its share of U.S. bond trading has increased by 1 percentage point to 12 percent.

``Lehman is not Bear,'' Deutsche Bank AG analyst Mike Mayo said in a report yesterday. ``It has more liquidity. It has support among its major counterparties. Its franchise is more diversified.''

Discount Window

Fed officials were instrumental in pushing through the JPMorgan deal for Bear Stearns as part of an effort to halt the erosion of confidence in financial firms. The central bank simultaneously announced that it would allow brokers to borrow from its discount window, typically open only to commercial banks, and would accept securities as collateral.

The Fed's action ``takes the liquidity issue for the entire industry off the table,'' Fuld said in a statement yesterday.

Lehman's stockpile of cash, money-market instruments, corporate bonds and equities available for sale is the largest among the five biggest brokers, according to Sanford C. Bernstein & Co. analyst Brad Hintz.

Lehman, the biggest underwriter of mortgage-backed bonds last year, owned $80 billion of the assets at the end of November. Half were tied to commercial mortgages. Prices on those securities have declined from 2 percent to as much as 19 percent in the past three months. About $5.3 billion of the holdings were backed by loans to subprime borrowers at greatest risk of default. Lehman limited its writedowns to $1.5 billion last year by using financial hedges.

Commercial Mortgages

Commercial mortgage-related assets caused $700 million of the writedowns last quarter, Lehman said. An additional $800 million came from residential home loans and securities tied to them. The leveraged loan portfolio had a $500 million valuation reduction.

When the leveraged loan market recovered briefly in the fourth quarter, Lehman sold almost two-thirds of its holdings, reducing the risk of losses when prices retreated again this year.

Years of diversification have helped Lehman weather the storm, Wachovia Corp. analyst Doug Sipkin said.

``Positives are diversity,'' Sipkin said in a note to investors today. ``Lehman is not a fixed-income shop. Equity trading, banking and asset management accounted for 93 percent of revenues.''

Counterparty Risk

Investors may pay less attention to earnings prospects and focus instead on any signs customers and trading counterparties are sticking with the firm, or moving elsewhere, analysts said.

``After what happened to Bear, I don't think you can say with absolute certainty that it can't continue to happen,'' said Peter Sorrentino, a Cincinnati-based money manager at Huntington Asset Advisors, which oversees $15 billion and owns shares of JPMorgan and Goldman. ``Could Lehman go the same way as Bear? I hate to think of it.''

U.S. Stocks Gain on Goldman, Lehman Earnings, Fed Speculation

March 18 (Bloomberg) -- U.S. stocks rallied the most in a week after Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. posted earnings that beat estimates and investors speculated the Federal Reserve will slash interest rates.

Goldman, the largest securities firm, climbed the most in more than seven years. Lehman, the fourth-biggest, posted its steepest gain ever. Citigroup Inc. and JPMorgan Chase & Co. climbed as traders predicted the central bank will reduce its benchmark rate by 1 percentage point to stem credit-market losses. Exxon Mobil Corp., the largest U.S. oil company, rose as crude recovered from the biggest drop in seven months.

The Standard & Poor's 500 Index added 31.76 points, or 2.5 percent, to 1,308.36 at 11:13 a.m. in New York. The Dow Jones Industrial Average gained 220.3, or 1.8 percent, to 12,192.55. The Nasdaq Composite Index increased 49.32, or 2.3 percent, to 2,226.33. Twelve stocks rose for every one that fell on the New York Stock Exchange. European and Asian stocks advanced for the first time in four days.

``It restores some confidence that the Street is not in nuclear meltdown,'' said Peter Sorrentino, who helps manage $15 billion at Huntington Asset Management in Cincinnati. ``There are some firms impacted but we're still talking about profits.''

Financial shares posted the top six gains in the S&P 500 as futures contracts indicated traders see a 100 percent chance the Federal Open Market Committee will cut its target for the overnight bank lending rate to 2 percent. The central bank's announcement is due around 2:15 p.m. Washington time.

Goldman, Lehman Beat

Goldman surged $17.88, or 12 percent, to $168.90. Net income fell to $1.51 billion, or $3.23 a share, in the three months ended Feb. 29 from $3.2 billion, or $6.67, a year earlier, Goldman said in a statement. The average estimate of 17 analysts surveyed by Bloomberg was for $2.59 a share, with forecasts ranging from $1.95 to $3.40.

Lehman, which lost 19 percent yesterday, climbed 35 percent today to $42.75. First-quarter net income declined to $489 million, or 81 cents a share, from $1.15 billion, or $1.96, a year earlier, the New York-based firm said. That beat the 72- cent average estimate of 16 analysts surveyed by Bloomberg. Earnings were depressed by a $1.8 billion writedown caused by the slump in the mortgage market.

Assuming Lehman will fail because Bear Stearns did is ``a bad bet to make,'' said Punk Ziegel & Co. analyst Richard Bove. While both are involved in mortgage securities, Lehman has more diversity from overseas operations, money-management businesses and more high-profile deals, Bove wrote in a note to clients.

`Bottoming Out'

Citigroup advanced $1.43, or 7.7 percent, to $20.05. JPMorgan, the third-largest U.S. bank, and Merrill Lynch & Co., the third-biggest securities firm, gained more than five percent each.

U.S. financial stocks are getting closer to ``bottoming out,'' analysts at Morgan Stanley said, trimming their sell positions in Citigroup and National City Corp.

``We view the banks as vulnerable to the credit cycle, with Fed rate cuts only a partial offset,'' the analysts, led by Nigel Dally, wrote in a report to clients. ``But some of these risks are now in the stocks.''

Financial shares tumbled to their lowest level in almost five years yesterday on concern Wall Street's biggest firms may be overvalued following the $2-a-share takeover of Bear Stearns Cos. by JPMorgan.

GM, Exxon

General Motors Corp. rose $1.02 to $18.85. The largest U.S. automaker has enough cash and doesn't expect any fallout from its ties to Bear Stearns, Chief Operating Officer Fritz Henderson said.

Exxon increased $1.51 to $87.30 as oil recovered some of yesterday's 4.1 percent retreat, the steepest decline since August 2007. Chevron Corp., the second-biggest U.S. energy company, added $1.13 to $85.32.

Crude oil for April delivery rose 1.5 percent to $107.24 a barrel in New York on speculation U.S. interest-rate cuts will drive the dollar down further, prompting investors to buy commodities.

Yahoo! Inc. rose $1.38, or 5.3 percent, to $27.23. The Internet search company that snubbed advances from Microsoft Corp. reaffirmed its forecasts for the first quarter and the year in a bid to prove it can stay independent. Cash flow may almost double in the next three years, Yahoo said.

Economy Watch

Prices paid to U.S. producers rose less than forecast in February, while prices excluding food and energy jumped the most since November 2006. The 0.3 percent increase followed a 1 percent gain in January, the Labor Department said. Excluding food and energy, so-called core wholesale prices climbed 0.5 percent, more than double the gain economists forecast.

Combined with figures last week showing consumer prices were unchanged in February, today's report signals companies may be faced with weaker profits as slowing demand reduces pricing power.

Housing starts in the U.S. dropped in February and construction permits fell to the lowest level in more than 16 years, signaling construction will continue to hurt economic growth. Builders broke ground on 1.065 million homes at an annual rate, down 0.6 percent from a revised 1.071 million pace in January that was higher than previously reported, the Commerce Department said.