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Stocks kicked off the second quarter with a modest gain as strong merger-and-acquisition activity overshadowed new signs of stress in the mortgage market.

The action did little to clarify the raging debate as to where this market is headed, though.


Dow Jones Industrial Average


S&P 500


Nasdaq Composite

each closed fractionally higher Monday after spending most of the day around unchanged. The mild action came in spite of a pair of big mergers and several smaller but still notable deals.

The biggest deal was the latest huge buyout from the deep pockets of private equity. Kohlberg Kravis Roberts is buying credit card processor

First Data

(FDC) - Get First Data Corporation Class A Report

for $34 a share, or $25.6 billion. First Data soared 21%.

In media land, Chicago real estate magnate Sam Zell won


( TRB), outbidding other billionaires with an $8.2 billion deal that rides on employee ownership. Tribune gained 2.2%.

TheStreet Recommends

Other big deals included the $1.5 billion


(XRX) - Get Xerox Holdings Corporation Report

buy of

Global Imaging

( GISX). Global Imaging soared 47% to $28.64.

But weighing on sentiment were the predictable

New Century


bankruptcy filing and a somewhat more alarming comment from sunny Buffalo, N.Y.

That's where regional bank

M&T Bank

(MTB) - Get M&T Bank Corporation Report

warned late Friday that it is feeling pain in the so-called Alt-A segment of the mortgage market. That's the business of lending to customers with decent credit scores but without full documentation -- as opposed to subprime, which is lending to homebuyers with poor credit histories.

M&T slashed its earnings guidance, sending its stock tumbling 8.8% and pulling down other lenders as well.


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Countrywide Financial

( CFC) slid 2.7% and 2.8%, respectively.

"The housing market may now be starting to see the front edge of the stresses associated with subprime and related mortgage failures, but we expect that process has only just begun," writes Peter Hooper, Deutsche Bank's chief global economist.

Meanwhile, investors are having a hard time figuring out what scenario is playing out in 2007.

Bulls looking for an up leg in stocks want to see some stabilization in the oil pits or in the housing market. But with lenders sliding anew and the price of crude oil up 15% since Iran captured 15 U.K. sailors on March 23, those obviously weren't forthcoming Monday.

Those looking for guidance from the


have been flummoxed as well. Weak manufacturing numbers have some bulls counting on a rate cut as soon as next month, but inflation has been uncomfortably high.

Where does it all lead?

Looking at various numbers, various commentators have compared this market to 1937 and 1987 and many years in between. Kevin Logan, an analyst at Dresdner Kleinwort Wasserstein, wrote in a report Monday that the current "macro puzzle" of slowing business investment amid rising profits reminds him of the Greenspan Fed's 1995 soft landing.

"The Bernanke Fed is trying to pull off the same trick this year," writes Logan.

Worries persist about profits slowing, consumers cutting back on spending, and inflation at uncomfortably high levels. Perhaps the key difference is that now the markets are coming to grips with the rabid credit-creation that led to a boom in subprime mortgage lending.

But Hooper and many other economists still expect a Fed rate cut this year. The fed funds futures market puts 60% odds on a cut in August, according to Miller Tabak. That market puts 80% odds on a second cut by year-end.

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


to send her an email.