Stocks stage rally

Wall Street hangs on to gains after the Fed announcement. Rally continues on optimism that the government is looking to stabilize the banking system.

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NEW YORK ( -- Stocks surged Wednesday as investors took comfort in reports that the Obama administration and the Federal Reserve are taking steps to get credit flowing again and help staunch the economic slowdown.

The Dow Jones industrial average (INDU) gained 200 points, or 2.5%. The Standard & Poor's 500 (SPX) index added 28 points or 3.4% and the Nasdaq composite (COMP) added 53 points or 3.6%.

The Dow has now gained for three sessions in a row, while the S&P 500 and Nasdaq have gained for four sessions in a row.

Stocks rallied through the early afternoon as more talk of the government taking toxic assets off bank balance sheets boosted the financial sector and the broader market.

Those gains were sustained through the close after the Federal Reserve kept a key short-term interest rate at all-time lows and pledged it was willing to do whatever it can to help get credit flowing again.

"The steps the Obama administration is taking and some of what we're seeing from the Fed will help rebuild confidence over time," said Rob Lutts, chief investment officer at Cabot Money Management. "But it's going to be gradual."

Lutts said that while the recent bout of optimism could lift stocks in the short term, beyond that is the risk of the major gauges sliding back to the November lows and perhaps even lower.

"The toxic paper still needs to be dealt with," Lutts said. "Until that happens and the banks get healthier again, there's going to be a noose around our economy's neck."

Treasury bond prices tumbled, boosting the corresponding yields, after the Fed statement implied that the bank was willing to buy long-term Treasury bonds, but did not indicate that it was planning to do so in the near term.

Oil prices gained and gold prices declined. The dollar strengthened versus other major currencies.

After the close, Starbucks (SBUX, Fortune 500) reported quarterly sales and earnings that were short of forecasts and said it could cut up to 6,700 jobs in 2009.

Thursday brings reports on durable goods orders and new home sales in December, as well as earnings from Dow component 3M (MMM, Fortune 500).

Federal Reserve: The central bank kept the fed funds rate, a key bank lending rate, in a range between 0% and 0.25%, as expected, and indicated it would keep it there for the foreseeable future. (Full story)

In its statement, the Fed painted a more dire picture of the economy than it has in recent months. The statement noted that industrial production, housing starts and employment have continued to decline steeply as spending has been cut back. Global demand has slowed. And falling oil and gas prices have added to the growing risk of so-called deflation. (Read the statement)

The Fed also discussed the tools it has available to help the economy, saying it was "prepared" to buy long-term Treasurys if it decides that doing so would help private credit markets. At the last meeting, the central bank said it was "evaluating" buying Treasurys.

"It was a garbled, long statement that didn't do much to clarify if they will buy long-term bonds, which is the critical element the market is interested in," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc.

Market pros are looking to see that the Fed might start buying the long-term bonds in the future, as it might help lower private borrowing rates, such as mortgage rates.

"I think the fact that they went into such detail about the tools they are considering may have confused people, but to me it says that they are trying to restore confidence," said Phil Dow, director of equity research at RBC Wealth Management.

"Bad bank" boost: Stocks rallied ahead of the announcement, extending the market's recent advance. All three major gauges posted modest gains on Monday and Tuesday despite weak economic reports, quarterly results and thousands of job cuts.

Wednesday's advance was led by news from the banking industry. Reports continued to surface that the Treasury Department was moving forward on setting up a "bad bank" to buy up the industry's toxic assets. A published report Wednesday suggested that the Federal Deposit Insurance Corp. (FDIC) would take control of any such bank. The FDIC told Reuters it wouldn't comment.

"Wall Street likes the 'bad bank' stuff," said Joseph Saluzzi, co-head of equity trading at Themis Trading. "It's still just a rumor, but a lot of people are betting on it being true, and they like the idea of it."

He said that longer term, it isn't clear whether the "bad bank" idea will really work, and that stocks will remain under pressure until the housing market bottoms and unemployment stops spiking.

For now, however, the talk was fueling a short-covering rally. Short-covering refers to a process by which investors who have sold shares short to take advantage of a falling market need to buy the shares back as the market reverses course.

Optimism about the Obama administration's stimulus plan and Wells Fargo's better-than-expected quarterly results also added to the advance.

Economic stimulus plan: The House of Representatives is expected to vote Wednesday evening on the $825 billion stimulus package developed by President Obama and House Democrats. The plan, which calls for roughly $550 billion in spending and $275 billion in tax cuts, is expected to pass easily, thanks to the Democratic majority in the House.

However, the House vote is just the first step in a process that will take several weeks. The Senate is debating a separate-but-similar version of the bill, to be voted on next week. If both versions pass, differences would have to be resolved in conference committee. Both chambers would then have to vote on the new version. The goal is to get a bill to Obama to sign by mid-February. (Full story)

Wells Fargo: The bank posted a steep $2.6 billion quarterly loss Wednesday, hurt partly by its purchase of Wachovia. But excluding charges, Wells Fargo earned 41 cents per share, in line with a year earlier, and better than the 33 cents analysts surveyed by Thomson Reuters expected.

The bank also maintained its dividend and said it has no plans to ask for more Treasury bailout money beyond the $25 billion it accepted last year. Wells (WFC, Fortune 500) shares rallied almost 31%.

Among other bank movers, Bank of America (BAC, Fortune 500) added 13.7% and Citigroup (C, Fortune 500) added 18.6%. Both stocks have been among the hardest-hit financial stocks this year.

American Express (AXP, Fortune 500) climbed 7%, one day after it reported quarterly results that weren't as terrible as some had expected.

The KBW Bank (BKX) sector index jumped 14%.

In other banking news, the Treasury Department said it has made $386 million available to healthy local banks as a means of stimulating lending.

Earnings: Dow component AT&T (T, Fortune 500) reported lower quarterly earnings and higher revenue, both of which missed expectations. The telecom leader saw strong growth in its wireless subscribers, but its profit fell due to subsidies it had to pay to support Apple's iPhone. Shares ended little changed.

Boeing (BA, Fortune 500) reported a fourth-quarter loss Wednesday as a two-month strike by its assembly workers and delivery delays hurt its results. The aerospace firm forecast 2009 earnings that are short of expectations. Boeing also said it would cut 10,000 jobs this year, mostly in the first half. The number includes 4,500 job cuts already announced in early January. Boeing shares ended little changed.

Yahoo (YHOO, Fortune 500) reported quarterly sales and earnings that topped estimates after the close Tuesday. Including charges, the company reported a loss. Shares gained 7.9% Wednesday.

Market breadth was positive. On the New York Stock Exchange, winners topped losers by over six to one on volume of 1.55 billion shares. On the Nasdaq, advancers beat decliners three to one on volume of 2.17 billion shares.

Bonds: Treasury prices slumped, raising the yield on the benchmark 10-year note to 2.66% from 2.52% Tuesday. Treasury prices and yields move in opposite directions. Yields on the 2-year, 10-year and 30-year Treasurys all hit record lows last month.

Lending rates were mixed. The 3-month Libor rate dipped to 1.17% from 1.18% Tuesday, according to Overnight Libor held steady at 0.22%. Libor is a bank-to-bank lending rate.

Other markets: In global trading, Asian markets were mixed and most European markets rallied.

The dollar gained versus the euro and the yen.

U.S. light crude oil for March delivery rose 58 cents to settle at $42.16 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $11.40 to settle at $890 an ounce.

Gasoline prices rose two-tenths of a cent to a national average of $1.842 a gallon, according to a survey of credit-card swipes released Wednesday by motorist group AAA.

Talkback: Get your economic questions answered. E-mail with questions about jobs, housing, energy, student loans, credit cards, Americans' spending and savings habits, etc., and they could be answered on air as part of the first CNN Money Summit.  To top of page

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