M&A's Rise Muted by Gold Rally

NEW YORK ( TheStreet) -- The return of mergers and acquisitions is a bullish sign for the stock market, but surging gold prices and a falling dollar may weigh on its positive effects, market analysts argue.

A handful of deals have been struck in the last few weeks, including Disney's ( DIS) acquisition of Marvel Entertainment ( MVL), Baker Hughes' ( BHI) $5.5 billion takeover of BJ Services ( BJS) and Japanese drugmaker Dainippon Sumitomo Pharma's purchase of Sepracor ( SEPR).

Tuesday's top headlines indicated that more M&A deals could be in the pipeline, as Cadbury ( CBY) rejected a $16.7 billion bid by Kraft Foods ( KFT), setting the table for some type of deal involving the two -- or, potentially, Hershey ( HSY).

In addition, Deutsche Telecom ( DT) announced it would link its T-Mobile U.K. unit with France Telecom's ( FTE) Orange U.K. division in a joint venture set to become the largest mobile provider in the country.

Normally, M&A announcements are treated as a bullish indicator by the market, and that held true Tuesday. The major U.S. averages were on the rise after European bourses and Asian markets advanced overnight, as traders took the recent deals as a commentary on how these companies view the stock market down the road.

"M&A activity can be viewed as a positive, as it shows companies have some confidence and feel it's the right time to go out and buy," said Richard Sparks, senior equity analyst with Schaeffer's Investment Research. "The argument can be made that the better time to buy was back in March, but we had a lot of fear in the market and companies were very unsure about how the future was going to look. This shows there is a little more positivity looking forward, at least with respect to the economy and individual earnings prospects."

AUDIO: Listen to Paul Nolte, director of investments with Hinsdale Associates, discuss the effects of M&A activity on the market:

Yes, the market has welcomed the recent M&A activity the same way it warmly greeted the government's nonfarm payrolls data -- and most other recent economic data, for that matter. However, price action in commodity and bond markets threatens to unravel the optimism M&A and economic data have fueled.

Earlier Tuesday, gold topped $1,000 an ounce while the dollar fell to its low for the year. This, market analysts argue, is more important for investors to pay attention to than recent deals.

"The biggest negative the market has to overcome is that gold is running up on speculation that the dollar will continue to lose its value," said Robert Pavlik, chief market strategist with Banyan Partners. "Sooner or later, the dollar will see a turning point. It depends on when the economy improves and whether the Federal Reserve is quick enough to pull back the liquidity they created for the environment."

Michael Pento, senior market strategist with Delta Global Advisors, argues that a "huge surge" in inflation is presaged by the gold market, outweighing any positive news gained from the M&A headlines.

"Inflation always destroys the earnings power of the company in the long-run, so I would say it's a cautionary sign," Pento said. "How can it possibly be that inflation can surge and the dollar can fall, yet corporate profits will continue to increase? That cannot exist. That type of environment is completely antithetical. You cannot have surging corporate profits in an inflationary environment."

Pento said that a rising headline number on the consumer price index will end up the hot topic by Christmas. "The biggest market is the foreign exchange market, and it's telling you that the bond market is wrong," he said. "It means the Federal Reserve could be very late in taking away the punchbowl. That's going to put the Fed in a box. Do they raise rates while the unemployment rate is soaring?"

Inflation fears aside, investors looking to trade merger news in the short term may already be out of luck. "Unless you have stock in the acquired company, once the deal is done and announced, there's not really much you can do," Schaeffer's Sparks said.

Banyan Partners' Pavlik said that long-term investors might find an opportunity in M&A buyers. "In the short term, it'll put pressure on the stock. It'll take time and focus, but eventually the deal may be accretive," he said. "That means a small pullback could be a buying opportunity for long-term investors. There are other ways to make money shorter term, but it does present a buying opportunity for the longer-term investor."

For those looking to invest in the stock market following in advance of more buyouts in the pipeline, market analysts argue it's too difficult to speculate which companies or sectors are ripe for takeovers. Banyan Partners' Pavlik says that if investors want to try and play the M&A game, the biotech sector has some potential takeovers. Schaeffer's Sparks said that while some areas seem brighter than others, there are hundreds of companies to keep tabs on.

"For some, the news is out there all the time and months pass without a purchase," Sparks said. "To try and game who is going to be taken over is very difficult."

-- Written by Robert Holmes in New York.

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