Stocks up on housing data

Stocks rallied Monday, led by shares of builders and banks, after a measure of home sales unexpectedly rose and foreign investors agreed to inject billions of dollars into a giant Swiss bank. The Dow Jones industrials gained more than 100 points.

The advance came as investors remained upbeat about the Federal Reserve’s rate-setting meeting today. The central bank is widely expected to lower rates, though economists are split over how big the cut will be.

Home builders in the Standard & Poor’s 500 index climbed 3% on Monday to their highest level since October after an index of pending sales climbed 0.6% and September’s increase was revised upward to 1.4%. D.R. Horton rose 90 cents, or 6.5%, to $14.76. Standard Pacific surged 36 cents, or 10%, to $3.94. KB Home rose 75 cents, or 3.2%, to $24.45.

The downturn in housing has led to huge losses among banks that invested in securities backed by sub-prime mortgages, and UBS on Monday was the latest to disclose a large write-down. The Swiss bank said it was reducing by about $10 billion the value on its books of mortgage-related holdings. The company’s U.S.-traded shares, however, rose $1.18, or 2.3%, to $51.66 after the bank said it was getting an $11.5-billion cash infusion from the government of Singapore and an unidentified Middle Eastern investor.

“There is optimism today that we have seen the worst in the financial sector,” said Donald Selkin, director of equity research at Joseph Stevens. “There is a feeling that these stocks have already discounted the worst-case scenario.”

Financial shares in the Standard & Poor’s 500 index climbed 2% to their highest level in a month. Also helping the sector was news that bond insurer MBIA was getting an investment of as much as $1 billion from a private equity firm.

Stocks overall also got a boost from forecasts by analysts at Lehman Bros., Bank of America and Deutsche Bank, who said the S&P; 500 would finish 2008 as high as 1,650 points, or 8.8% higher than Monday’s close of 1,515.96 points. For the day, the index was up 11.30 points, or 0.8%.

On Monday the Dow jumped 101.45 points, or 0.7%, to 13,727.03. The Nasdaq composite index added 12.79 points, or 0.5%, to 2,718.95.

The Russell 2,000 index of smaller companies rose 5.68 points, or 0.7%, to 791.20.

Advancers outnumbered decliners by almost 2 to 1 on the New York Stock Exchange.

Bond yields rose. The 10-year Treasury note climbed to 4.16% from 4.11% late Friday.

The dollar was mixed against other major currencies, and gold prices rose.

Oil prices were volatile. Crude futures finished down 42 cents at $87.86 a barrel on the New York Mercantile Exchange.

Wall Street has posted robust gains recently as investors have grown more confident in the Fed’s openness to loosening its policy again. The Dow has risen more than 640 points in the last two weeks, bringing the blue-chip index to within 4% of the record close it set Oct. 9.

Trading in interest rate futures indicated a 72% chance the Fed today would trim its benchmark interest rate by a quarter percentage point and a 38% chance of a half-point reduction.

In the financial sector Monday, MBIA rose $3.95, or 13%, to $33.95. The bond insurer, seeking to avert a crippling reduction of its AAA credit rating, plans to sell $500 million of common stock to Warburg Pincus. The private equity firm may invest an additional $500 million next year as part of a rights offering, MBIA said.

JPMorgan climbed $1.34 to $47.42. Citigroup rose 46 cents to $34.77. Bank of America gained $1.27 to $46.64. Financial shares in the S&P; 500 have fallen the most this year among 10 industries, losing 14%.

After the closing bell, Washington Mutual said it would record a $1.6-billion write-down on its home loan business, discontinue all sub-prime mortgage lending, eliminate 2,600 jobs and sell $2.5 billion in convertible preferred stock in a public offering. The company’s shares tumbled $1.76 to $18.12 in after-hours trading after closing up 85 cents, or 4.5%, at $19.88.

In other market highlights:

Blackstone Group might be planning a bid to acquire steel company Rio Tinto, a British newspaper reported. Blackstone jumped $1.52, or 6.9%, to $23.45, and Rio Tinto rose $9.71, or 2.1%, to $477.71.

MGI Pharma soared $6.55, or 20%, to $40 after Japanese drug maker Eisai agreed to buy the U.S. pharmaceutical company for $3.9 billion.

McDonald’s rose $1.74, or 2.9%, to $61.90 after the company said global same-store sales rose 8.2% in November.

Caterpillar rose $2.38, or 3.2%, to $76.58 after a Bear Stearns analyst highlighted the farm and building equipment maker’s focus on China, where the construction market is expected to keep surging.

Amazon.com fell $1.29 to $93.02. A research firm said online sales growth in the U.S. slowed last week to 20% as retailers lowered prices to lure shoppers during what could be the worst holiday shopping season in five years.

Amgen fell $1.11 to $50.99. Sanford C. Bernstein & Co. downgraded shares of the biotechnology firm to “market perform” from “outperform.”

Overseas, key stock indexes fell 0.2% in Japan and 1.2% in Hong Kong. Shares rose 0.2% in Britain, 0.5% in Germany and 0.6% in France.