Stocks Surge after Historic Fed Rate Cut

The FOMC slashed the Fed funds rate 75 basis points and detailed other moves to stabilize markets and the economy

U.S. stocks jumped Tuesday after the Federal Reserve cut interest rates to almost zero and pledged to do even more to mend credit markets and revive the economy.

The Fed went deep, cutting the benchmark U.S. federal funds rate by three-quarters of a point, more than the half-point reduction that economists had expected. The new target range for the fed funds rate is 0% to 0.25%, the lowest level on record.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Federal Open Market Committee (FOMC) said in a statement, adding it expects "exceptionally low levels for the federal funds rate for some time."

In further efforts to ease the credit crisis, the Fed committee also said it "stands ready" to expand purchases of debt and mortgage-backed securities, and may even buy longer-term Treasury securities.

Major U.S. equity indexes gained ground after the Fed's announcement.

On Tuesday, the 30-stock Dow Jones industrial average rose 359.61 points, or 4.2%, to 8,924.14. The broad S&P 500 index closed 44.61 points, or 5.14%, higher at 913.18. The tech-heavy Nasdaq composite index climbed 81.55 points, or 5.41%, to 1,589.89.

Stocks were up moderately even before the Fed announcement. According to S&P's Marketscope, the market was led higher by Goldman Sachs Group (GS). Despite announcing its first quarterly loss since going public, the Wall Street firm's results were better than feared, and its stock rallied 14%.

Also in Tuesday's session, traders weighed reports that showed U.S. housing starts plunging 18.9% in November, while the consumer price index fell 1.7%, and the core CPI, which excludes food and energy prices, was unchanged.

On the New York Stock Exchange, 27 stocks moved higher for every five in negative territory. On the Nasdaq, the ratio was 22 to 6 positive.

Bond prices jumped Tuesday after the Fed said it may buy long-term Treasuries.

In company news Tuesday, Goldman Sachs reported a $2.12 billion fourth-quarter net loss that translated into a $4.97 loss per share, above Reuters estimates of a $3.73 loss per share. Trading and principal investments registered net revenue declines of $4.36 billion, while compensation and benefits fell 46% from 2007 to $10.93 billion. Meanwhile, Goldman's Tier 1 capital ratio was reported at 15.6%.

Best Buy (BBY) posted better-than-expected third-quarter adjusted earnings per share of 35 cents, vs. 53 cents one year earlier, on a 5.3% same-store sales drop and a 16% total revenue rise. Wall Street was looking for 25 cents EPS in the current quarter. The company said the negative impact of the same-store sales drop and expense deleverage was partially offset by revenue gains from new store openings as well as an improvement in the gross profit rate. Best Buy maintains its guidance range for fiscal 2009 EPS of $2.30- $2.90, excluding an investment impairment charge.

American International Group (AIG) said its U.S. life insurance companies have sold to Maiden Lane II LLC (ML II), a newly formed Delaware limited liability company in which the Federal Reserve Bank of New York (FRBNY) is the sole member, their interests in a pool of $39.3 billion face amount of residential mortgage-backed securities (RMBS) held by their agent, AIG Securities Lending Corp., an AIG subsidiary, in connection with AIG's U.S. securities lending program. The agreement in principle between AIG and the New York Fed for this transaction was announced on Nov. 10.

Electricite de France SA is close to an agreement to buy half the nuclear power business of Constellation Energy Group (CEG) for $4.5 billion, trumping a takeover bid by Warren Buffett's MidAmerican Energy Co., people familiar with the situation said, according to a Bloomberg report.

Harley-Davidson (HOG) announced that President and CEO James L. Ziemer has informed the board of directors that he intends to retire in 2009. The board has formed a search committee to review both internal and external candidates. Ziemer will remain in his current role until a new CEO is in place.

General Electric (GE) announced that it will Webcast its annual December outlook meeting with investors Tuesday at 3:00 p.m. ET. GE Chairman and CEO Jeff Immelt will host the meeting and discuss the company's outlook for the remainder of 2008 and for 2009.

In other U.S. markets Tuesday, the 2-year Treasury yield dove 19 basis points after the Fed announcement to 0.68%, while the 10-year yield dropped only 11 basis points to 2.40%.

The U.S. dollar index dipped to 81.61.

January West Texas Intermediate crude oil futures were down 9 cents to $44.42 per barrel Tuesday as OPEC prepares to meet to cut production quotas. Venezuela, Iran pushing for cuts of 1 million to 2 million barrels a day. Russia said it would join in production cuts, which adds to OPEC muscle. Some skeptical the cuts will work with world heading into the worst recession in decades. Also, OPEC notorious about not abiding by production quotas. Venezuela and Iran are dependent on higher prices to fund ambitious domestic programs.

February gold futures were higher at $842.60 per ounce.

In company news Tuesday, Goldman Sachs reported a $2.12 billion fourth-quarter net loss that translated into a $4.97 loss per share, above Reuters estimates of a $3.73 loss per share. Trading and principal investments registered net revenue declines of $4.36 billion, while compensation and benefits fell 46% from 2007 to $10.93 billion. Meanwhile, Goldman's Tier 1 capital ratio was reported at 15.6%.

Best Buy (BBY) posted better-than-expected third-quarter adjusted earnings per share of 35 cents, vs. 53 cents one year earlier, on a 5.3% same-store sales drop and a 16% total revenue rise. Wall Street was looking for 25 cents EPS in the current quarter. The company said the negative impact of the same-store sales drop and expense deleverage was partially offset by revenue gains from new store openings as well as an improvement in the gross profit rate. Best Buy maintains its guidance range for fiscal 2009 EPS of $2.30- $2.90, excluding an investment impairment charge.

American International Group (AIG) said its U.S. life insurance companies have sold to Maiden Lane II LLC (ML II), a newly formed Delaware limited liability company in which the Federal Reserve Bank of New York (FRBNY) is the sole member, their interests in a pool of $39.3 billion face amount of residential mortgage-backed securities (RMBS) held by their agent, AIG Securities Lending Corp., an AIG subsidiary, in connection with AIG's U.S. securities lending program. The agreement in principle between AIG and the New York Fed for this transaction was announced on Nov. 10.

Electricite de France SA is close to an agreement to buy half the nuclear power business of Constellation Energy Group (CEG) for $4.5 billion, trumping a takeover bid by Warren Buffett's MidAmerican Energy Co., people familiar with the situation said, according to a Bloomberg report.

Harley-Davidson (HOG) announced that President and CEO James L. Ziemer has informed the board of directors that he intends to retire in 2009. The board has formed a search committee to review both internal and external candidates. Ziemer will remain in his current role until a new CEO is in place.

General Electric (GE) confirmed fourth quarter EPS guidance of $0.50-$0.52, excluding previously announced $1.0-$1.4 billion of charges ($0.36-$0.42 Q4 EPS, including charges); it sees 2008 EPS of $1.78-$1.84 on $185 billion revenue. For 2009, it has set forth a framework of industrial businesses' earnings growth of 0%-5%. Also says it will no longer provide specific quarterly EPS guidance, but will provide a full-year operating framework with detail in the industrial and financial businesses.

In other U.S. markets Tuesday, the 2-year Treasury rose 05/32 to 101-04/32 for a yield of 0.65%; the 10-year Treasury jumped 2-08/32 to 113 for a yield of 2.27%; and the 30-year Treasury added 4-28/32 to 135.03/32 for a yield of 2.75%.

January West Texas Intermediate crude oil futures were down 35 cents to $44.16.

February gold futures were higher at $858.80 per ounce.

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