Stocks Rally Ahead of Fed Decision

Traders were awaiting the 2:15 p.m. ET announcement from Bernanke & Co. Oil prices continued to fall
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Major U.S. stock indexes rallied late Tuesday morning ahead of the Federal Reserve's decision on interest rates, expected at 2:15 pm ET. An increase in a closely watched gauge of service-sector activity helped lift sentiment. Oil and gold futures skidded amid speculation the commodities bubble may be bursting, according to Standard & Poor's MarketScope.
Bonds were trading lower ahead of a Treasury refunding program scheduled to start Wednesday amid indications the government will have to issue more debt. The dollar index was higher.
On Tuesday, the Dow Jones industrial average gained 190.52 points, or 1.69%, to 11,474.67. The broader S&P 500 index added 19.05 points, or 1.53%, to 1,268.06. The tech-heavy Nasdaq composite index rose 33.34 points, or 1.46%, to 2,318.90.
Activity in the broader market was positive. On the News York stock exchanges, 21 stocks rose in price for every seven that declined. The ratio on the Nasdaq was 16-8 positive. Trading was moderate, with financial, consumer discretionary, and industrial issues higher.
"On a short term basis, the burden of proof is probably on the bulls that they can generate enough buying interest to sustain something more than a 1-2 day rally," according to Richard Dickson and Tracy Knudsen of Lowry's Reports in North Palm Beach, Fla.
The Fed is expected to leave the Fed funds rate target unchanged at 2.0% although some board members might call for a rate hike. There is some uncertain what the FOMC will say about the economic outlook in light of recent mixed data, as the Fed contends with inflation, slow growth, and the ongoing credit crunch. Fed chairman Ben Bernanke could talk tougher on inflation to head off dissent from potentially widening to three FOMC members, according to a Bloomberg article.
"Any such shift would not come without risks, such as spooking investors if the Fed came off too hawkish relative to increasingly fragile economic conditions -- especially after he widened those goal posts in recent monetary policy testimony," wrote Action Economics analysts in a website posting.
In economic news Tuesday, the U.S. ISM services composite index improved to 49.5 in July after falling over 3 points to 48.2 in June. The general activity index was little changed at 49.6 from 49.9. The employment component rose to 47.1 after hitting a record low at 43.8 in June. New orders index slipped to 47.9 from 48.6. New export orders slid to 47.9 from 52.0, back below 50 for the first time since February. Prices paid fell to 80.8 from the record 84.5 in June.
Though the headline index was a little better than the market expected, mix of data won't have much market impact ahead of the FOMC meeting, reports Action Economics, but the softness in some of the key components will add to concerns on the Street over a slowdown in growth.
“Although quantitatively the nonmanufacturing ISM index was somewhat less weak than expected, qualitatively the story for the economy is unchanged,” wrote economist John Ryding of RDQ Economics in an Aug. 5 note. “In our judgment, the dominant theme remains stagflation and, with the Fed more focused on growth and financial stability, the risk is that inflation moves higher in 2009.”
Oil futures were falling amid reports Tropical Storm Edouard went through the heart of the Gulf of Mexico's oil belt without causing major damage, and was heading for landfall along the Texas/Louisiana border. September West Texas Intermediate crude oil futures were off $1.60 to $119.81 per barrel.
August gold futures were lower at $888.50 per ounce.
Among Tuesday's stocks in the news, Procter & Gamble (PG) reported fourth quarter earnings per share of 92 cents, vs. 67 cents one year earlier, on a 10% revenue rise. The company sees fiscal 2009 EPS of $4.18-$4.25 (GAAP basis), which includes an estimated 50-cent gain from the sale of its Folgers coffee business and a 12-cent investment in incremental restructuring.
Bankrate (RATE) posted second quarter adjusted operating EPS of 39 cents, vs. 35 cents one year earlier, on a 73% revenue rise. As previously announced on July 7, the company lowered its 2008 annual guidance as a result of softness in display advertising. The company expects annual revenue to be between $164-$169 million and adjusted EBITDA of $54-$58 million. Jefferies cut its price target on the shares to $35 from $54. The firm also cut its estimates on Bankrate and reiterated its hold recommendation.
Molson Coors Brewing (TAP) reported second-quarter non-GAAP EPS (underlying after-tax income) of 93 cents, vs. 97 cents one year earlier, as higher special charges, increased energy and commodity inflation in all markets, and a higher effective tax rate for the second quarter offset a 4.8% sales rise.
Marvel Entertainment (MVL) posted second-quarter EPS of 59 cents, vs. 34 cents one year earlier, on a 55% sales rise. The company sees $1.55-$1.75 2008 EPS on revenue of $450-$480 million. Marvel’s guidance now includes results from its Film Production unit.
Archer-Daniels-Midland (ADM) posted lower-than-expected fourth-quarter EPS of 58 cents, vs. $1.47 one year earlier, on a 78% revenue rise. Wall Street was looking for a profit of 67 cents. The company notes results in the prior-year period include after-tax gains on asset sales of 95 cents per share.
Tenet Healthcare (THC) posted a second-quarter loss of 3 cents per share vs. a loss of6 cents one year earlier on a 6.3% revenue rise.
Allied Capital (ALD) posted a second-quarter loss of 59 cents per share vs. 57 cents EPS one year earlier as a net change in unrealized appreciation or depreciation offset a 14% rise in total interest and related portfolio income.
CNBC reports Lehman Brothers Holdings (LEH) is considering selling its entire investment management business, including private equity and hedge fund stakes, rather than just its Neuberger Berman business, as the bank looks to raise capital.
UBS reportedly initiates coverage on Apple Inc. (AAPL) with a buy rating.
UBS also reportedly upgraded American International Group (AIG) to buy from neutral.
Major European indexes were trading higher Tuesday. In London, the FTSE 100 index climbed 2.14% to 5,434.20. In Paris, the CAC 40 index rose 2.42% to 4,384.40. Germany’s DAX index gained 2.69% to 6,520.53.
Major Asian equity indexes lost ground Tuesday. Japan’s Nikkei 225 index fell 0.14% to 12,914.66. In Hong Kong, the Hang Seng index tumbled 2.51% to 21,949.75.
Treasury market
Treasuries were mixed ahead of the FOMC meeting. The 10-year note was lower in price at 99-05/32 for a yield of 3.983%, while the 30-year bond was lower at 96-13/32 for a yield of 4.598%. The U.S. government will sell $17 billion of 10-year notes on Wednesday and $10 billion of 30-year bonds on Thursday.