This cryptic error means that you don't have a C compiler installed. There was a discussion to propose a more explanative error (which is continued here, register and comment if you care about it!) but currently it is still not implemented.
To fix this issue you can either install the Visual Studio 2008 SDK which will take about a GB, or you can install the very small VCForPython27.msi but which is not well supported by distutils currently, here's the procedure:
1) install Microsoft Visual C++ Compiler for Python 2.7 from
http://www.microsoft.com/en-us/download/details.aspx?id=44266
2) Enter MSVC for Python command prompt
3) SET DISTUTILS_USE_SDK=1
4) SET MSSdk=1
5) you can then build your C extensions: python.exe setup.py ...
Steps 2 to 4 must be reproduced everytime before building your C extensions. This is because of an issue with the VCForPython27.msi which install the header files and vcvarsall.bat in folders of a different layout than the VS2008 SDK and thus confuse the compiler detection of distutils. This will get fixed in setuptools in Python 2.7.10.
Bug report and workaround by Gregory Szorc: http://bugs.python.org/issue23246
More info and a workaround for using %%cython magic inside IPython: https://github.com/cython/cython/wiki/CythonExtensionsOnWindows
/EDIT: Also, if you have another version of Python, you cannot use Microsoft Visual C++ for Python 2.7, which is a kind of mini-compiler specifically made by Microsoft for Python 2.7. In this case, you need to install the Visual Studio SDK that match your Python version, or a Windows SDK with the correct NET framework version. See here for more infos: https://github.com/cython/cython/wiki/CythonExtensionsOnWindows#using-windows-sdk-cc-compiler-works-for-all-python-versions