One day of selling and we are back on the edge of the abyss again.

So what happened today? Mortgages got killed today.
On December 16, 2008 I wrote the following about Mortgages and the Fed’s $500 Billion Mortgage Purchase Program –

"Buy Mortgage Backed Securities

On 11/25, the Fed announced a $500 billion program to buy Mortgage-Backed Securities issued by the US Government Agencies, Freddie Mac and Fannie Mae. The Fed already started buying these securities, weeks before today’s announcement.

The purchase program has brought up a couple of concerns. The primary concern is that if these mortgages are written by US Agencies and carry the “implicit guarantee” of the US Government, then why does the Fed have to print $500 billion in new money to buy some of them?

The answer is two fold. First, if the government completely takes over Freddie and Fannie and issues an “explicit guarantee” for their paper, then the US Government has to move the debt of Freddie and Fannie onto the Balance Sheet of the US Treasury, forcing the US Government to add over $5 trillion to that year’s deficit and over $5 trillion to the US Government Debt total (off balance sheet accounting).

The other concern is that the move is designed to raise the prices on all $5 trillion of the bonds, while they are only threatening to buy $500 billion of them. This is the old “Fractional Banking System Game”, where you act like you have enough money to cover anybody who wants to sell today, but in fact you only have a fraction of the total amount on hand and are really just bluffing.

The concern is then what happens to the prices of mortgages when the Fed spends the $500 billion? About 80% of PIMCO’s flagship mutual fund is invested in US Agency mortgages. Don’t you think they will want to sell a bunch of that junk at a fat premium to the Fed? I know that Foreign Governments are unloading that stuff at a rate of over $20 billion a month. China alone has well in excess of $500 billion in Agency paper."

http://nbcharts.blogspot.com/2008/12/todays-rate-cut.html

The Markets are simply calling the Fed’s bluff. The Fed will have to pony up another chunk of dough very quickly.

Today we also had Meredith Whitney telling us how bad of an ideal the “Bad Bank” is. The “Bad Bank” is now estimated to cost the Taxpayer an additional $2 to $4 Trillion. I’ve got an idea – give the Shareholders the “Bad Bank” and the Taxpayers the “Good Bank”.

The numbers of Dollars that the US Government is going to end up printing to buy all of the toxic mortgages off of the balance sheets of US Banks and Foreign Central Banks is truly staggering.

Now back to the Markets
Most Indexes pulled back into the breakout points of yesterday. That is normal and is Bullish if those breakout levels hold. It is obviously Bearish if they fail to hold.

Let’s see what the next few days bring. The Fed has done a lot of big things over the weekends. I’m sure that they will be busy at work this weekend too, hammering out a “Bad Bank” model to force feed to the taxpayer.

That said, there is zero leadership right now and if all this rally turns out to be is 300 Dow points, then a new leg down may be very near.