More Room to Run

 | Sep 27, 2011 | 7:01 AM EDT
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We don't trade Greek bonds. We trade companies that sell small amounts to Greece. We don't own Italian debt. We trade companies that have some exposure to Italy. We don't lend against Spanish treasury bills. We buy stocks that have a small exposure to Spain.

And that's always been the problem. The linkage is forever being considered one-to-one, as if the multinational stocks we own will be clubbed and crushed by the collapse of the European dominos.

It doesn't matter if that isn't true. We can shout it until we are blue in the face that Nike (NKE) is not a good short off of Italy or that VF Corp. (VFC) shouldn't be dumped off of Greece and Clorox (CLX) shouldn't be affected at all because it doesn't even sell stuff there.

Doesn't matter.

They all trade with the failure to contain Greece and the lack of gumption by the Europeans.

So when the Europeans actually make noises about doing something good, when they actually seem to be shamed by everyone from the U.S. to the Chinese to the Africans to the IMF into readying a TARP to backstop their governments and their banks -- as Steve Liesman at CNBC said in the most important breaking story this year -- then all of those stocks that shouldn't have gone down now go up ... even though they shouldn't!

It is just the movie in reverse.

Immediately people came out and said, "It can't be true." These are the same people who came out and said, "It can't be true" after Tim Geithner told you that they were not going to have any more Lehmans.

But today's rally, a second day, puts into question whether both Geithner and the story that broke yesterday are false. Too much information now to believe they are false.

Given that, as I wrote yesterday, we have many, many stocks that are down more than 20% off their highs because of a combination of a European slowdown and a hard landing that is supposed to happen in China, there is more room to go up, especially after last week's decline. Plus it is the end of the month.

But the simple fact is that all of the collateral damage plays that were almost destroyed by European contagion fears deserve a few days' rally, and the facts seem to have changed for real.

What was amazing was the suspended animation after the story first broke. The skepticism was so thick that even when Liesman came out and said that the big TARP-like function is in the works, the market rallied a few Dow points and then went down again because everyone is so, so negative about anything good that can happen.

As of this morning it looks like they were TOO negative.

You take Lehman off the table, you Citigroup (C) the banks, things get sloppy -- but remember, as of yesterday these European banks were selling at 0.3x and 0.4x book, and there isn't that much more left (unless you think they all close, and somehow I don't think that's the case). In other words you needed a Lehman to go lower from where they were Friday morning and, well, it looks like we aren't going to get one.

Before anyone says, "Europe is all better," you have to recognize that what matters is the pricing of the goods going into this change that was obviously in the works on Friday. When they are priced for total disaster and you don't get a disaster, you get a rally of more than a one day.

You may even get more than a two-day rally. In fact you could rally until you see if the structured vehicle backstops things as it is supposed to.

There will be many who want to play the banks on a bounce. I would rather buy all the stocks that were trashed that shouldn't have been.

They represent the more sure buys because, unlike the banks, they should never have gone down to begin with.

Random musings: Gold's margin selling is behind it. If you want to know the stocks that could go higher they are, in order, Randgold (GOLD), Goldcorp (GG) and Barrick (ABX).

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