Salient to Investors:

European companies most dependent on revenue from Spain, Italy, Greece and Portugal are rising in the stock market at the fastest pace in five years, providing chances for short sellers after two earlier rallies fizzled.

Bears cite Spanish unemployment surging to a record, austerity measures pushing Italy into the biggest economic contraction in 3 years and Greece risks breaking the terms of a EU-led bailout. Bulls cite valuations below historical averages and ECB support reduces the threat of a euro breakup.

Sharon Bell at Goldman Sachs sees no real evidence that things have picked up. Bell says political and central bank moves have supported these stocks, but the underlying economies remain weak, so earnings for these are likely to remain weak.

European stocks that had the biggest declines last year have led gains since the end of July.

Matthieu Giuliani at Banque Palatine said they can have a technical rebound, but structurally the countries lack competitiveness Giuliani said these countries are moving in the right direction, but the road is long, and is not buying Spanish or Italian stocks.

Goldman Sachs started advising investors to short companies with sales in Spain, Italy, Greece and Portugal in 2010 but ended the recommendation after Draghi’s July pledge. In September Goldman said the stocks will trail European indexes until their economies themselves start to outperform.

Lex van Dam at Hampstead Capital said government restrictions on betting against many stocks in southern Europe creates a conundrum for investors, and isn’t touching anything there.

Sergio Cano at Gesinter says stocks already reflect the slowdown we’ll see in demand and is buying.

James Butterfill at Coutts said you had a crisis, then a response, then the rally, and now we are back to complacency, which will lead to crisis again.

The IBEX 35 fell below book value this year for the first time since at least 1998 but has since risen to 1.05 following the rally since July. Analysts expect IBEX 35 earnings to fall 36 percent between 2010 and 2013, Italy’s FTSE MIB Index earnings to be little changed, and DAX Index earnings to increase 30 percent.

Gilles Sitbon at Sycomore Asset Mgmt said buying into the advance is risky as people have no idea what is going to happen with the fiscal cliff, with Spain, with more austerity going through – sequentially, things are getting worse.

Read the full article at