Guess What Led To This Rally

Several events came together midday to help stocks rally:

1) A drop in the dollar about 2 PM ET, which has helped the market several times in the last couple days.

2) Details of a Republican counter-stimulus plan which emerged a little after 2 PM ET, a $445 billion proposal that would lower the 35 percent corporate tax rate to 25 percent and offer home buyers a tax credit worth $15,000 or 10 percent of the purchase price, whichever is less.

3) Just before 3 PM ET, Treasury Secretary Tim Geithner said fiscal policy was about to get "very aggressive."

Financials suffer under Washington rumor mill.

I mentioned earlier today that traders are hopeful that some clarity on the stimulus package, TARP and bad bank will be coming in the next few days.

This will be helpful, but in the meantime financials are experiencing the downside of this rumor mill.

It's pretty simple: financials are down because traders believe that TARP II will be heavily dilutive. They are concerned that the feds will put more money into the banks, potentially wiping out the equity shareholders, particularly of companies like Citi and Bank of America .

Will this happen?

Bears have argued for months that the common equity of many big banks is worthless. That's been around for a while. But now, they are worried that the preferreds may also be worth almost nothing (a la Fannie Mae and Freddie Mac ).

Also, the hope that bank earnings will stage a big recovery is being hurt by worries about increased regulation.



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