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Tuesday, September 27, 2011 11:53 AM

European Stocks Climb Most in 16 Months; Pimco's El-Erian Says "Europe Finally Gets It"; El-Erian is Wrong in Multiple Ways

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For three days European stocks have soared 7% with the beaten up banking sector up even more. This is the biggest rally since May 10, 2010. That rally did not hold, and while anything is possible, this rally is unlikely to hold either. In the meantime, enjoy the rally.

European Stocks Climb Most in 16 Months

Bloomberg reports European Stocks Climb Most in 16 Months Amid Effort to Contain Debt Crisis

European stocks climbed the most in 16 months amid speculation policy makers will increase efforts to contain the region’s sovereign-debt crisis.

Rio Tinto Group led a rally in raw-material shares, surging 7 percent, as metal prices rose. BNP Paribas (BNP) SA and Societe Generale (GLE) SA, France’s biggest banks, soared more than 12 percent. MAN SE (MAN) rose 6.9 percent as European Union regulators cleared Volkswagen AG (VOW)’s takeover of the truckmaker.

The benchmark Stoxx Europe 600 Index climbed 4.4 percent to 229.88 at 4:36 p.m. in London. That’s the biggest gain since May 10, 2010, when it jumped 7.2 percent after the EU unveiled a 750 billion-euro ($1 trillion) loan package aimed at controlling the debt crisis. The gauge has surged 6.8 percent over the past three trading days after falling to a two-year low on Sept. 22.

The Stoxx 600 fell 26 percent from this year’s peak in February through Sept. 22 as European and U.S. economic reports trailed forecasts, adding to concern that the global recovery is at risk. The decline left the measure trading at 9 times estimated earnings, the cheapest since March 2009, data compiled by Bloomberg show.

U.S. Treasury Secretary Timothy F. Geithner predicted that European governments will step up their response to their region’s debt crisis after a chiding from counterparts around the world.

“They heard from everybody around the world” in Washington meetings last week, Geithner said on ABC’s “World News With Diane Sawyer” program. Europe’s crisis is “starting to hurt growth everywhere, in countries as far away as China, Brazil and India, Korea. And they heard the same message from us they heard from everybody else, which is it’s time to move.”
Stocks Not Cheap

For starters, stocks are not particularly cheap. Earnings in general will be worse than expected because consumers have increasingly thrown in the towel and much of the global economy is back in recession. Banks are still hiding losses, and European banks are way over-exposed to sovereign debt not remotely marked-to-market.

While the 3-day euphoria spreads, I point out many times in the past six months where there have been 1- to 3-day rallies that all died.

This time the market is giddy over EFSF leverage that the German parliament may not even approve, and the German supreme court says "not without a referendum".

Please see Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for details.

Europe Finally Gets It

El-Erian Says "Europe Finally Gets It"
“What I learned in Washington is that Europeans finally get it,” El-Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “They recognize they have deep problems and they recognize they need to do something about it. And now they are going back and will try to do something about it. This was a very important wake-up call for Europe.”

Talk is Cheap

El-Erian says that European leaders are now "all saying the right things". What right things? There is bickering over bank capitalization ratios, bickering over how banks will be recapitalized, and bickering over whether or not Greece will default and if so what the haircuts will be.

None of the talk regarding the currently hatched plan addresses haircuts that are coming.

European leaders have their heads in the sand, or perhaps up Treasury Secretary Tim Geithners' ass as it was Geithner who actually hatched the ballyhooed leveraged bailout scheme.

Yes, they have hatched a plan to use leverage, but that plan has enormous risks. Moreover, it is questionable at best the German supreme court will allow that plan to stand.

Even if the plan does stand, throwing trillions of Euros around just to prevent Greece from defaulting hardly seems like a sensible policy. The sensible policy would have been to let Greece default two years ago.

Throwing Trillions of Euros is Not "Getting It"

Europe does not "Get It", nor does El-Erian. In the end, El-Erian is just another monetarist who thinks the answer to problems is sloshing around money, at taxpayer expense, to bail out banks and bondholders who should instead have to take losses for poor lending decisions.

This is Not "Getting It". Rather it is "Going All In" instead of taking writeoffs that are going to happen anyway. Thus, El-Erian is wrong in more ways than one.

Mike "Mish" Shedlock
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