Stocks stage rally

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%, according to early tallies. The Standard & Poor's 500 (SPX) index added 28 points, or 3.4% and the Nasdaq composite (COMP) added 53 points or 3.6%.

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.

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 was cutting 6,000 jobs in 2009.

Fed: The central bank kept the fed funds rate unchanged near 0%, as expected. The Fed funds rate is a key short-term bank lending rate that impacts consumer and business loans. (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 said it was willing to take more steps to get credit flowing again, including buying long-term Treasurys, if it decides such a move would help improve conditions.

"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 had already rallied Wednesday 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 25%.

Among other bank movers, Bank of America (BAC, Fortune 500) added 13% and Citigroup (C, Fortune 500) added 15%. Both stocks have been among the hardest-hit financial stocks this year.

American Express (AXP, Fortune 500) jumped 5%, one day after it reported quarterly results that weren't as terrible as some had expected.

The KBW Bank (BKX) sector index jumped 12%.

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 fell 1.5%.

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 were 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 8% Wednesday.

Bonds: Treasury prices slumped, raising the yield on the benchmark 10-year note to 2.62% 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 Bloomberg.com. 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 $42.16 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $11.40 to $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.