U.S. Stocks Rise as Commodities Rally on Goldman Recommendation

May 24, 2011, 9:58 AM EDT By Rita Nazareth

May 24 (Bloomberg) -- U.S. stocks rose, rebounding from a one-month low, as commodities rallied after Goldman Sachs Group Inc. signaled a positive outlook for raw materials.

Freeport-McMoRan Copper & Gold Inc. and AK Steel Holding Corp. rallied at least 1.5 percent. El Paso Corp., owner of the largest U.S. network of interstate natural-gas pipelines, jumped 7.1 percent amid plans to spin off its exploration and production unit. AutoZone Inc. climbed 5.1 percent as profit at the auto-parts retailer topped estimates. GT Solar International Inc. soared 11 percent after the maker of polysilicon manufacturing equipment forecast earnings that beat projections.

The Standard & Poor’s 500 Index increased 0.3 percent to 1,321.20 at 9:33 a.m. in New York. The gauge yesterday had the biggest decline in two months. The Dow Jones Industrial Average advanced 22.41 points, or 0.2 percent, to 12,403.67 today.

“There’s a battle between good long-term fundamentals and short-term uncertainties,” said David Kelly, who helps oversee about $445 billion as chief market strategist for JPMorgan Funds in New York. “It’s most likely that any slowdown in the global economy is temporary. There are reasons why economic growth should pick up around the world on the second half of the year. If you buy that notion, this is a good time to take advantage of that. The stock market still looks attractive for the long run.”

Commodities, Europe

The S&P 500 fell 3.4 percent through yesterday since climbing to a three-year high on April 29 amid a commodity slump and concern about Europe’s debt crisis. Still, the benchmark has rallied 4.8 percent from the end of 2010 amid government stimulus measures and higher-than-estimated earnings.

Goldman Sachs and Morgan Stanley increased their oil price forecasts by more than 20 percent, signaling a bullish outlook for commodities. Goldman, which correctly advised investors to sell crude oil and copper last month before a price slump, boosted its 12-month prediction for Brent crude to $130 a barrel from $107, analysts led by Jeffrey Currie said in a report today. Morgan Stanley raised its Brent estimate by 20 percent to average $120 a barrel this year and by 24 percent to $130 in 2012, it said.

“Economic growth will likely be sufficient to tighten key supply-constrained markets in the second half, leading to higher prices from current levels,” the Goldman analysts said. They also advised buying copper and zinc.

‘Underweight’

The S&P GSCI spot index of 24 commodities lost about 10 percent through yesterday since New York-based Goldman told investors on April 11 to sell a basket of commodities including oil, copper and cotton, and in the same week recommended they stay “underweight” in raw materials. Global manufacturing activity measured by the JPMorgan index slowed for two consecutive months and stood at 55 in April. A reading of 50 and above suggests expansion.

Purchases of new houses probably held close to a record low in April, showing the real-estate market remains a weak link in the U.S. expansion, economists said before a report today. New homes sold at a 300,000 annual pace last month, the same as in March, according to the median forecast of 75 economists surveyed by Bloomberg News. Purchases sank to a 270,000 pace in February, the weakest in 48 years of data.

Some commodities producers rallied as oil and metal prices gained. Freeport, the world’s largest publicly traded copper producer, rose 2.2 percent to $48.47. AK Steel added 1.6 percent to $14.30 as the third-largest U.S. steelmaker by sales said it will increase prices for all carbon flat-rolled steel products by at least $50 per ton to recover higher costs.

Tax-Free Spinoff

El Paso jumped 7.1 percent to $20.32. The company plans a tax-free spinoff, Chairman and Chief Executive Officer Douglas Foshee said at an analyst meeting in New York today. The decision comes after pipeline operator Williams Cos. said on Feb. 16 it will sell 20 percent of its production unit later this year. The company said it will sell the stake in an initial public offering and spin off the rest in 2012, to give shareholders “greater value.”

“Given the quality of El Paso’s pipeline assets, we believe there would be strong demand for a purer-play pipeline company,” Citigroup Inc. analysts Faisel Khan and Timm Schneider said in a May 20 note to clients. The exploration and production unit may be worth as much as $15 a share and it may have an $8 billion enterprise value, which includes the sum of shares and debt less cash, they wrote.

AutoZone rose 5.1 percent to $290.94. The U.S. auto-parts retailer reported third-quarter earnings of $5.29 a share, topping the $4.97 estimated by analysts on average.

GT Solar International jumped 11 percent to $12.92. The maker of polysilicon manufacturing equipment raised its 2012 earnings estimate to at least $1.55 a share, more than the average analyst estimate of $1.48 a share. The company also raised its revenue projection.

--Editors: Joanna Ossinger, Michael Regan

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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