Historically the bottoming process can have some wild swings while the market builds itself a new foundation. Although stock indexes are 22% off their lows it’s still contrarian to think this is more than a bear market rally. However, it does appear to be part of the bottoming process, which is almost as comforting.

Yesterday’s existing home sales number showed a surprising spike to the positive, up 5.1% while consumers are taking advantage of the deep discounts resulting from foreclosures. The median home price is down 15.5% from last year. Although the latter isn’t a happy fact, it’s what needs to happen for buyers to sniff around.

The stock market likes the details of the PPIF but a pull-back today doesn’t surprise me. Although it will take a while to demonstrate whether or not it will work it is the first time a direct attack on toxic assets has been implemented. All other attempts have been pulled back before they had a chance. The same risks are still there in valuing toxic (aka legacy) assets on banks’ balance sheets because only the owners actually know what they’re worth. Not only can they decrease in value because their elements default but they can increase when recovery comes or an actual market is created and then by banks selling they expose themselves to opportunity risk. Another detail that may make people weary is that PPIF encourages using leverage. A private investor can split the cost in half with the government and then finance it to purchase up to six times more. The tax payer then makes half of whatever the private investor gains. The plan will work if investors find a reason to buy and if banks find a reason to sell.

Strategic planning on the part of officials sent yields to the floor last week when the Fed announced its plan to purchase treasuries. Prices need to be supported, not only to keep yields low in effort to lower borrowing rates but because treasury issuance is funding the bailout. When the stock market has a good day (or days) treasuries tend to suffer as a result of asset flow. The details of Geithner’s plan released yesterday made the market optimistic that our government has the ability to fix our problem.  Normally when stocks rally like that we see a spike in yields but that didn’t happen.

So now the next few days will tell the truth about equities and the next few weeks about our recession timeline. This afternoon’s 2 yr auction will be closely watched because it’s the first since details of the Fed treasury buy-back and PPIF (or P, whatever). You’ll notice treasury price charts look like they have just readjusted into a higher range, but are still sloping downwards. Questions, comments please.

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