Day 2 of the Geithner rally?
European markets have been on a tear since the US Treasury secretary assured us that we are not about to see a replay of Lehman. Will our market follow suit?
Ever since U.S. Treasury Secretary Tim Geithner made it very clear that, despite what you may think, there will not be Lehman-style crisis in Europe, the European markets that dominate ours have been on fire.
Some people have told me: Wait, in April Geithner said there was no way the U.S. debt would be downgraded and he got that wrong. Why is this any different?
The answer, I think, is that it has been within the control of Europe to get the European banks where they need to be; they have just haven't exercised control. You still have banks issuing big dividends -- how can Banco Santander (STD) have an almost 10% yield? You still do not have disclosure, and you still have derivatives that will be difficult to unwind.
But solvency of a bank is in the eyes of the beholder, and the individual country governments are the beholders. We just have to own up that, if you are tough, every major bank over there could be considered insolvent. But "considered" is different from "is," and there are no runs on the joints. I will detail later what's ailing SocGen more thoroughly, but it is pretty easy to see how the bank situations are manageable via either quasi-nationalization or merger, shotgun or otherwise.
You take a Lehman off the table, which the Treasury secretary did emphatically, and you take off systemic risk at a moment where we hear there is a ton of it. That means prices are too low over there.
Again, just as you may think it is irrational that our markets go down on theirs, you may consider it irrational that our markets go up on theirs. I just want to remind you that two-way streets, however illogical, do flow -- which doesn't mean that we have to go up but that the companies doing well will go up, particularly those nonfinancials that are considered to have strong exposure to Europe.
I am calling it the Geithner rally. It surely isn't the Trichet rally. Or the Merkel rally. We needed some certainty. Geithner has guaranteed it, and despite his April guarantee about no downgrades, I think this time he has a handle on the players and, as behind the curve as they are, they can get the systemic risk removed even as they can’t get their stumbling economies growing any better than we can.
At the time of publication, Cramer had no positions in the stocks mentioned.
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