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Deals Can't Start Market's Fire

Stocks struggle despite Cerberus' bid for Chrysler and other M&A activity. CPI and Fedspeak ahead.

So much to worry about, so little time. Merger, earnings and economic worries trumped any attempts to sustain Friday's rally and left major indices searching for their footing Monday.

The buyout theme may be getting old on Wall Street as the overall market couldn't sustain an early session rally on the news that Cerberus Capital won its bid for the U.S.-based Chrysler Group.

Or the lack of enthusiasm for the auto deal could be because traders saw the deal as a confirmation of the history-making failure of the U.S. auto industry. It's not the kind of M&A that deserves cheers.

So desperate was

DaimlerChrysler

(DCX)

to get rid of Chrysler and its pension and benefits obligations that it will end up losing money to make the sale to Cerberus. The deal is valued at about $7.4 billion, a far cry from the stunning $36 billion Daimler paid for the car maker in 1998. Still, Daimler's stock gained 2.6% on the news.

"It just makes you think twice about these dying U.S. industries," says Art Hogan, chief market analyst at Jefferies & Co.

Other deals announced Monday that failed to inspire the broader market included:

Merck KGaA's selling its generic-drug business to Mylan Laboratories for 4.9 billion euros ($6.63 billion);

Cardinal Health agreeing to buy Viasys Healthcare for about $1.42 billion;

Primedia selling its portfolio of enthusiast magazines and Web sites to Source Interlink $1.2 billion in cash.

Hogan adds that Monday's market was mostly characterized by a "wait and see" mindset.

After trading as high as 13,384 and as low as 13,297 intraday, the

Dow Jones Industrial Average

finished up 0.2% to close at 13,346.78. Meanwhile, the

S&P 500

and the

Nasdaq Composite

finished in the red, down 0.2% and 0.6%, respectively.

Indeed, a heavy week of economic data, earnings and Fedspeak commences Tuesday.

Investors will learn whether the consumer price index for April confirms Friday's largely benign producer price index. In addition, the regional New York Empire State Index for May is released as is March's measure of net foreign purchases, a.k.a. the TIC data.

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The foreign flows data will be edifying in assessing the sustainability of global liquidity, which has kept stock and bond prices firm, says Rod Smyth, chief investment strategist at Wachovia Securities.

While investors worry that the falling U.S. dollar may decrease the appetite abroad for dollar-denominated securities like Treasuries, there is ample evidence that foreign banks with massive currency reserves are increasingly interested in "real" assets in the U.S., such as real estate and technology goods, Smyth notes.

The same may be true for U.S. equities. The demand for many kinds of investments around the world is increasing, he notes. It comes from China loosening rules on foreign investment for its banks and institutions, and from the burgeoning middle class in developing countries, which has spawned an explosion of new retail brokerage accounts. It also could be coming from the state level in China as well, he writes.

In March, China said it will set aside $200 billion of its $1.2 trillion in reserves to start an investment fund that Smyth notes would compete with or become clients of hedge funds or private-equity funds. Earlier this month, Chinese officials said the fund was not yet up and running, but that it would soon be operational.

On top of the obvious boost to securities markets around the world, "these new state investment funds are being created to facilitate the development of their countries," writes Smyth.

Development means "infrastructure," and continued demand for related goods and services -- all of which raises developing nations' standard of living.

This logic brings Smyth, and many investors, back to large multinational corporations, best-fit to benefit from these demographic and developmental trends.

And speaking of large-cap multinational corporations, the last three DJIA components to earnings will do so Tuesday and Wednesday.

Home Depot

(HD) - Get Home Depot, Inc. (HD) Report

and

Wal-Mart

(WMT) - Get Walmart Inc. Report

report before the opening bell Tuesday, and

Hewlett Packard

(HPQ) - Get HP Inc. (HPQ) Report

reports after Wednesday's closing bell.

Thus far, the Dow outpaces the S&P 500's earnings growth for the first quarter, recording 14.9% year-over-year growth, vs. 8.3% for the S&P 500, with 90% having reported, according to Thomson Financial analyst John Butters.

Butters says the S&P 500 is unlikely to reach double-digit earnings growth. Even if every company left to report beat estimates by 6.3% (this quarter's average positive surprise), year-over-year growth for the quarter would reach only 9.1%.

If that's not enough to worry about, there's always Ben Bernanke, who is on tap to speak twice this week, on Tuesday and Thursday.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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