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Europe—Will the Numbers Be Big Enough?

It's crunch time: German Chancellor Angela Merkel has to show her hand. German paper Der Spiegel has talked to parliamentarians in Germany who have been briefed by Merkel on what she will be proposing to the Bundestag's budget committee tomorrow, and the full Bundestag on Wednesday.

1) on leveraging the EFSF: Der Spiegel says she will propose a 1 trillion euro leveraging program. Analysts had been throwing around a 1 to 2 trillion euro leverage program, but it's not clear if this will include the creation of a special purpose vehicle by the IMF that will add additional firepower to the EFSF.

This is likely to be a DISAPPOINTMENT to the Street. The Street believes the deep pockets of the ECB will be necessary to really backstop Italy and Spain. The Street wants to see BIG MONEY and the ECB (and the IMF) are the only ones with sufficient money.

2) on a Greek haircut: a cut of up to 60 percent is being floated, equal to the 50 to 60 percent analysts had been discussing.

This is likely to be SATISFACTORY to all but the biggest euro pessimists, though many will argue that the haircut should apply to Greek debt that is held privately (banks) AND publicly (by the ECB, for example).

3) bank recapitalization: about 100 billion euros have been floated to bring core Tier One capital ratios to 9 percent.

This is below the 200 billion euros that have been thrown around and is likely to be a DISAPPOINTMENT to the Street; traders are particularly suspicious that the figure of 100 billion apparently was derived by including "gains" on German and French bonds in the calculation.

So why do stocks keep advancing? The S&P is at a 2-month high, busting out of a trading range, and so has the DAX in Germany. The CBOE Volatility Index (VIX) is below 30.

Hasn't Merkel told us to temper our expectations? If it's still all about Europe, shouldn't stocks sell off and go back to the middle of the trading range?

Yes, if it is indeed all about Europe. But there's a small but persistent group who argue that the U.S. can indeed advance if there is modest progress in Europe: I get comments from this group that say "earnings better than expected" and "economic data not as bad as feared" and "China is not falling apart" and "much of the rally is due to short covering," and I do believe there is something to it.

So is "groping toward a solution in Europe" enough to keep pushing the market forward, given that China and the U.S. are not falling apart? At 1125 on the S&P 500, I think the answer is yes. But at 1250 — where we are now, the high end of the recent range — likely not.

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