What's Next? Dow 5,000?

What's Next? Dow 5,000?
By Morgan Housel March 2, 2009 Comments (16)
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If someone told you one year ago that Bear Stearns, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Wachovia, Lehman Brothers, Merrill Lynch, and Citigroup (NYSE: C) 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, last month, if you told anyone the Dow would be on the path to some obscenely low number -- we'll call it Dow 5,000 -- most wouldn't take you all that seriously, either.

Well, Fools, meet insanity. It's quickly becoming the new reality.

What's notable about today's trip below Dow 7,000? Not that 7,000, or 5,000, is really of any significance. Other than being a psychologically painful barrier, the Dow'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 fall. 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 hardToday's big news, for example, was word that AIG (NYSE: AIG) was back at the trough, hoping another $30 billion of taxpayer dole will do the trick. This after reporting the largest quarterly loss in history -- any company's history -- of $61.7 billion. Do the math: that's $7,762 per second.

Problem is, this is AIG's fourth bailout in six months. Citigroup is on round three. Bank of America (NYSE: BAC) is hoping bailout part deux 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. On the other end of the spectrum, Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) actually want to pay their TARP money back because -- surprise -- Uncle Sam, as it turns out, can be the ficklest of business partners.

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? 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 I think means nationalization 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, stock indices won't be far behind. And around and around we go.

Where to now? Last October, at the pinnacle of market hysteria, we ran a poll asking Fools how low the Dow might go. 66% of respondents didn't think it would dip below 7,500.
In the spirit of the wisdom of crowds, we'll try it again: How low do you think the Dow will go?

http://www.fool.com/investing/dividends-income/2009/03/02/whats-next-dow-5000.aspx


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