Has The Rally Begun?

The S&P 500 rose 1% yesterday and after the close Yahoo reported better than expected earnings to give futures a little lift. However, the rumors of an Obama plan to set up a Bad Bank to relieve banks of their toxic assets is what investors are anxious to see. If the financials can improve their balance sheets and become liquid again, the credit markets are likely to open up more. A free flowing credit market will result in new lending and possibly a jump start to the weakened economy.

This is the big Tea Leaf all investors are looking for. If the Obama financial team can also introduce a credible plan to stimulate housing, the 2 big cogs in the depressed economy will be positively impacted.

The only downside is the structure of the Bad Bank. How much do they pay for the bad assets and how do they pay for it? It would be a good idea for the government to join forces with private equity firms and hedge funds to form a partnership in owning the Bad Bank. Such an enterprise would placate taxpayers and investors. The private sector would likely price the distressed securities correctly and give not only themselves an ability to earn a good return but improve the chances of the government not throwing away more of the public's money.

This morning Wells Fargo reported very weak earnings but said they won't be asking the government for more money and it's not cutting its dividend. Their numbers after adjustments seem to have beat analysts' expectations. The stock is reacting well as it rises 20% this morning. The results coupled with the Bad Bank concept is driving their stock as well as most financials higher.
A strong financial sector is what the market needs to get the Obama rally. Yesterday may have been the first day of such a move but today we should see a strong carry through. Enjoy the ride as volatility is still in the market and many more negative surprises are likely to pop up on the way.