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Why Are Stocks Holding Up So Well?

There's been a modest midday rally on reports that China may invest in the EFSF.

As I pointed out this morning, this is part of a much wider plan by China to have more sway in the EU and the IMF. Peter Boockvar has also pointed out that investing in the EFSF also provides diversification from U.S. Treasurys.

Besides that headline, why are stocks holding up so well? It's the source of great debate. The S&P 500 is just off its highest level since August, while sovereign credit spreads continue to widen. Several explanations:

1) Europe: there is a small but substantial group who insist that despite the uncertainties, muddling through with a plan still in the making may be good enough in the short term. "We know the solutions and are now simply negotiating price and who gets to takes the losses," one trader wrote to me. "It may take a while yet but we continue to make progress."

2) U.S. equities are benefitting from European money flows...yes, it's a zero sum game.

3) "Hope." This is an alternate way of describing the "greed trade": traders have had a miserable second half, many are underperforming. Many were too short when they should have been long, and vice versa. They are desperate to make their numbers. This drives higher risk-taking.

4) Speculation that the U.S. can start trading independent of Europe. There is an odd mix of anticipation and excitement over tomorrow's GDP — why? Many have numbers are higher than the roughly 2.3 percent increase that is expected — some are expecting numbers closer to 2.5 percent. Joe LaVorgna at Deutsche Bank told me: "the risks are definitely to the upside. 3% GDP is possible. And yes, this would help us disengage from Europe, no question."

Financial transaction tax:it won't go away. Elsewhere, for those of you who didn't read Merkel's speech to the Bundestag this morning, here's an interesting quote: "the federal government is committed to the introduction of a financial transaction tax."

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