Market participants spent the session focusing on word the government may be close to creating a "bad bank" that will purchase risky assets from existing banks. Divesting risky assets would help banks protect against further asset write-downs, and increase cash on their books. That would help limit the need to raise additional capital, which can be dilutive to shareholders.
Helping financial companies restore their health is largely seen as the first step in repairing the financial system and the broader economy. The financial sector responded by gaining 13%, leading the broader market more than 3% higher.
Wells Fargo (WFC 21.19, +5.00) provided the most support to the financial sector and the broader market. It gained 31%, marking its best single-session performance in months. Wells Fargo won kudos after announcing it is maintaining its dividend, and has no plans to ask for additional TARP capital. Wells Fargo reported a loss of $0.79 per share including items, but a profit of $0.41 per share after excluding the items. The consensus called for earnings of $0.33 per share.
Dow components Boeing (BA 43.24, +0.02) and AT&T (T 25.91, -0.02) traded as laggards after reporting unimpressive quarterly results. WellPoint's (WLP 44.50, +1.88) latest earnings were in-line with expectations. Yahoo! (YHOO 12.24, +0.90) and ConocoPhillips (COP 50.16, +0.65) both topped earnings estimates. Yahoo, along with other large-cap tech names, helped drive gains in the Nasdaq. ConocoPhillips provided leadership to the energy sector, which was also helped by a modest rebound in crude oil prices.
Crude finished the session roughly 1% higher, just above $42.00 per barrel. Crude was actually down 2.4% in the wake of a larger-than-expected build in weekly inventories. That marked the fifth straight build for weekly inventories.
In its first session of the new year, the Federal Open Market Committee left its fed funds target rate unchanged at 0.00% to 0.25%, as expected. The target rate is likely to remain at exceptionally low levels and reflects the FOMC's view that the economy remains weak. In turn, the Fed says its focus is to support financial markets through open market operations and other measures.
The Fed also stated it continues to purchase large quantities of agency debt and mortgage-backed securities. Such a move helps put cash back into the system, and helps support the mortgage and housing markets. The FOMC stated it is prepared to purchase longer term securities if evolving circumstances indicate that it would be effective in improving conditions in credit markets.
Statements from the FOMC and word that a bad bank plan may be in order helped drive the stock market to its fourth straight gain. Stocks are up roughly 5.5% during that time.
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