The FTSE 100 has hit a 6-year low, and may be headed to 3,000, or even below. Shares are cheap, but first the banks must be fixed, and this time, fixed properly.
If someone told you at the start of last year that Bradford & Bingley, Northern Rock, HBOS, Royal Bank of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY) would be either bankrupt or saved while en route to bankruptcy, most people wouldn't have taken you seriously.
And as recently as, I don't know, maybe a couple of weeks ago, if I told you the bottom of this market may still be ahead, and FTSE 3,000 is not out of the question, you'd have thought I was off my rocker.
Well, Fools, meet insanity. It's quickly becoming the new reality.
What's notable about today's trip down towards FTSE 3,600, a 6-year low for the leading index? Not that 4,000, or 3,700, is really of any significance. Other than being a psychologically painful barrier, the FTSE's short-term fluctuations are of little importance.
What's notable is that the mood doesn't seem to be the panicky, 10% daily drops, sell-now-and-ask-questions later mood we saw last October and November. Not that anyone's claiming to speak for Mr. Market, but the mood now seems to be based on coming to terms with the financial sector's insolvency. In other words, as markets keep falling, the selling is getting more and more rational.
Falling Hard
The most recent news, for example, came after HSBC (LSE: HSBA) disappointed the market with weaker-than-expected earnings, a massive £12.5bn rights issue and a dividend cut. In the US, AIG (NYSE: AIG) was back at the trough, hoping another $30 billion of taxpayer bailout money will do the trick. This after reporting the largest quarterly loss in history -- any company's history -- of $61.7 billion. It works out to $7,762 per second.
Problem is, this is AIG's fourth bailout in six months. Citigroup (NYSE: C) is on round three. Royal Bank Of Scotland is hoping bailout part three or four (I've lost count) will be enough.
That's what's underscoring the market's plunge right now: Every "plan" so far has been a finger-in-the-dike attempt at plugging a hole that's getting exponentially larger.
The original idea was that by preventing systemic collapse, private capital would eventually be lured back into financial markets, hence paving the way for recovery. But since every few weeks the rules change, the strategy shifts, and the dilution gets bigger, no investor in their right mind wants to dip their toes in.
Can They Handle The Truth?
In the US, General Motors (NYSE: GM), Chrysler, and Ford (NYSE: F) had to submit turnaround plans and a general strategy as to how they'll dig out of their hole. No one really takes these goals seriously, but at least there's a strategy. There are clear-cut rules and deadlines that need to be met. There's clarity, if you want to call it that.
Banks don't have anything remotely close. It's a free-for-all of, "A few billion here, a couple billion there. Change the rules here. Add more terms there." Investors, rightfully so, want nothing to do with it. No one wants to play until they know the rules.
Until there's a coherent plan, (which may end up being nationalisation of at least a few of the walking dead), investors will stay a million miles away from financial investments -- even if assets look undeniably cheap. As long as that's the case, banks will crumble; As long as that's the case, the economy will follow suit; And as long as that's the case, the stock market won't be far behind. And around and around we go.
Where To Now?
The market really is difficult to predict. There is nothing but bad news on the wires, and that isn't going to change any time soon. There simply is no catalyst to turn this market around, or not one I can see anyway.
The only hope is that one day, collectively, investors suddenly decide shares are far too cheap, and they buy, buy, buy. But just because shares are cheap isn't a catalyst to turn this market around, or not yet anyway. That might happen if the FTSE 100 hit 3,000.
At the rate we're going, the good news is that could happen by early next week. Phew.
In the spirit of the wisdom of crowds, we'll try a poll: How low do you think the FTSE 100 will go? Take a second to click here and weigh in with the Fool poll, and share your thoughts in the comment section as well if you wish.
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> This article was originally published on Fool.com. It has been updated.
> Of the companies mentioned in this article, Bruce Jackson has a very small beneficial interest in Lloyds Banking Group.
