AUCTION WEEK

It started in Portugal yesterday and continued on today over here. Ours went ok but though well-covered, demand was blah. Later this week, Thursday to be exact, the Spanish are teeing up a four year issue with promises from the Chinese and the Japanese of support. Of course, the ECB is also standing in the wings, checkbook in hand and pen full of ink, kinda like the Federal Reserve or daddy walking behind his kid the first time the little dear finds himself on a two-wheeler. No crash allowed; mommy will be quite cross. Which makes me wonder, as an American football coach once said; "What the hell is goin' on out there?"

We have already discussed the craziness of the Fed in its QE II exercise, which by the by was highlighted on the first business page of the NY Times today. To digress for a moment, it was a pretty interesting story. According to the Times, the exercise actually involves but 4 people and when the Fed is ready to do something a bell rings in all the dealing rooms of the primary dealers and they submit prices electronicly to the Fed which uses its own internal algorithm to sort out the offers. Of course the Fed only has a bid which makes anyone who has ever sat on a trading desk wonder how the hell one "trades" when it's one-way traffic much less show a profit out of so doing. Anyway, enough of that.

And so, it seems to me that what the ECB is doing is allowing every Tom, Dick and Harry the opportunity to unload their positions onto the unsuspecting 350-million-odd who make up the population of Western Europe which makes me ask the question why the hell are you doing that? Wouldn't it be far better for all concerned if a mechanism was found to allow investors to take up issues such as the up-coming Spanish exercise for which there is going to be a healthy premium and hold on to it until it's maturity? Even though there is a permanent bid in the market (the ECB) investors will demand--and get--a heck of a coupon which is not at all good for the Juan Carloses of the world. Indeed, Spain right now looks better than some other folks so if they pay, say, 6%, what pays Ireland? The more I think about it the more it seems to be a losing strategy not to mention the amount of money that-theoretically--it might take to deal with the PIGS' issuance over the next few years because this situation is not going away. Would it not be better, for example, to simply present purchasers with the option of taking the yield or buying a guarantee from the ECB, or for that matter simply guaranteeing the principal amount of any issuance right from the get-go? Do that and two things happen: first, the cost to the issuer comes way down and second, you can bet your boots that at a point in the not so distant future, the yield whores will emerge clamoring for straight issuance and when that happens my son, the trumps shift from buyer to seller very rapidly. Of course the fiscal fixes must be put in place but I look at that as a given. For the life of me if you are going to accept the fact of ECB support why not be smart about it? Comments?

Well, shifting continents, Illinois still hasn't bit the bullet as of this writing and the make-up of the legislature changes tomorrow. It was pointed out to me that I was playing the "percentage fear" game by discussing the proposed 75% tax increase without pointing out that the numbers behind that scary figure move only from 3% to 5% which, admittedly, are pretty small numbers. Nevertheless, they could be career-enders for the politician that votes "Aye" with the political climate as it is in the U.S. The oil will be burning well into the night in Champlain whereas out west, ol' Moonbeam has really bitten the bullet...we think. The details are yet to be discussed. More on that.

Finally, a shout-out to my really smart friend, Larry. The Bank of China late this afternoon announced in New York that it will begin making a market for the RMB to U.S. clients. No details as of yet but I think I'm right as to what the real intentions of our Oriental friends might be. I'll catch hell from Larry tomorrow! Pray for me.