The Market Gets a Reality Check

The market finally seemed to get the reality check last week that so many were calling for, as participants realized a quick economic recovery scenario was not realistically in the cards. The Dow posted its first weekly decline in a month and only its third weekly loss since the March 9 low. For the week ended June 19:

Dow: Down 3% to 8539.73

S&P 500: Down 2.6% to 921.23

Nasdaq: Down 1.7% to 1827.47

After briefly turning positive for the year in the prior week, both the Dow and the S&P 500 remain in the red for the year. Financials led the market down for most of the week, as investors digested the Obama administration’s proposed overhaul of the financial regulatory system.

Companies tell all
Taking a look at the company headlines last week gives us a nice picture of where we are.

Let’s start with FedEx (NYSE: FDX  ) ; the company is a kind of proxy for the economy, since it ships so much volume. The global package courier said, “the worst is behind us,” but issued quarterly guidance sharply lower than analysts’ expectations. The company cautioned that 2009 will be “extremely difficult” through November, as manufacturing is expected to decline year over year through the summer. This shows that economic conditions aren’t coming up daisies, as the recent market run would have persuaded investors to believe.

What’s more, fertilizer giant PotashCorp (NYSE: POT  ) announced last week that it will curtail its production output by 800,000 metric tons, bringing total production cuts to 5.5 million metric tons since last August. The company cited a languid spring season in the U.S. market as the cause. Potash’s actions are another sign that global growth has yet to recover anytime soon.

Bankruptcies continue to occur frequently. Outdoor apparel retailer Eddie Bauer, established in 1920, filed for bankruptcy, caving under a heavy debt burden. Private equity firm CCMP Capital Advisors has offered to pay $202 million for the company’s assets; however, its creditors or other parties could bid for the company’s assets as well.

Job losses still lurk. MySpace, owned by News Corp. (Nasdaq: NWS-A  ) , laid off almost one-third of its U.S. workforce, as the social-networking site attempts to cut costs and compete with rival Facebook.

Consumers are still clenching their purse strings tightly. Best Buy (NYSE: BBY  ) posted fiscal first-quarter results that beat the consensus on Wall Street. However, the nation’s largest consumer electronics company issued a cautious outlook, acknowledging an uncertain operating environment and tough upcoming year-over-year comparisons. Same-store sales slipped 4.9% on lower prices and store traffic.

However, it was not all gloom and doom last week. Remember, the tech-heavy Nasdaq is weathering the market slightly better than the other indices.

BlackBerry maker Research In Motion (Nasdaq: RIMM  ) reported a 33% surge in fiscal first-quarter profits, as new subscribers got on board. People are requiring these devices more and more, as 24-hour messaging becomes mainstream. What was interesting about RIM’s report was that 80% of the company’s new subscribers were consumers or small businesses (that’s up 60% from last year). 

This is especially interesting given that Apple’s (Nadsdaq: AAPL) iPhone is so popular with the consumer, which is Apple’s core market. It shows RIM is gaining traction in the consumer market. Let’s see how the battle for market share plays out between RIM, AAPL and now Palm’s (Nasdaq: PALM  ) Pre. Look out for Palm’s earnings next week to see if the company’s new phone could make the pioneer in smart, handheld devices a comeback kid.

What’s in store for this week & beyond
This week, market participants will be focused on the Federal Reserve’s monthly policy-making meeting on Wednesday. While no policy is expected to be made per se, investors will pay close attention to the central bank’s comments -- searching for any slight change in verbiage that could imply a future change in policy. Also on Wednesday, durable goods orders and new home sales for the month of May will be reported, and could be possible market catalysts. This week also brings short-term Treasury auctions and earnings from Walgreen (NYSE: WAG  ) , Oracle (Nasdaq: ORCL  ) , Nike (NYSE: NKE  ) , Palm, and Monsanto (NYSE: MON  ) .

We’re still searching for the next big catalyst, as markets have traded flat to down over the last two weeks on seasonally low volume. That catalyst could be second-quarter earnings coming up in July. Believe it or not, investors are beginning to look ahead to that. Should companies fall short of the expectations priced into stocks, we could see another leg down. On the bright side, dips offer individual investors the luxury of buying fundamentally sound companies at cheaper prices.

For related Foolishness:

Jennifer Schonberger owns shares of Oracle, but does not own shares of any of the other companies mentioned in this article. Best Buy and FedEx are Motley Fool Stock Advisor recommendations. The Fool owns shares of Best Buy. The Motley Fool has a disclosure policy.


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