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Week Ahead: Stocks Ride the Merger Express

Like a runaway train, merger activity will continue to drive stocks this week, but investors will keep a cautious eye on key retailer earnings and economic data likely to impact day-to-day moves.

"If you're short on Friday, you're going to get run over on Monday," joked a trader at a big sell-side firm late Friday afternoon as the market was chalking up a healthy gain. That trader was actually only half kidding, and was referring to the weekly expectation that Monday will bring a new wave of merger news. Already, there are news reports that a final deal for Chrysler could be announced Monday, and Mylan Labs this weekend said it is buying Merck KGaA's generics business for $6.7 billion.

With the exception of Thursday's downdraft, blue chips continued their upward march last week, but the overall market ended mixed. The Dow closed out its sixth week of gains up 0.46%, or 61.60 points. The S&P 500, in its reach toward the record 1527, chalked up just 0.23 points and was basically flat on the week at 1505.85. The Nasdaq, hard hit Thursday, fell 9.93 points or 0.39% for the week, despite its big 1.12% rebound on Friday.

Econorama The important one to watch this week is Tuesday's Consumer Price Index, expected to be up 0.5% for April.

"CPI is big. If you look at the PPI report, some of the intermediate goods, ex food and energy, were on the high side. But people don't let PPI guide their thinking. They're more worried about the consumer, so CPI trumps PPI," says our Rick Santelli from the Chicago futures pits.

The muted inflation number in Friday's producer price report (PPI) is what got Wall Street rolling again after Thursday's selloff, so Tuesday's number will be a major focus across all markets. From his perch at the NYSE, our Bob Pisani says the Friday inflation data got traders again chatting up the idea of a Fed ease, particularly as the April retail sales data reported Friday showed weakness. Pisani says traders this week are looking for a tip off on the economy and the consumer in comments from Wal-Mart when it reports first-quarter profits Tuesday. Wal-Mart reported a disappointing 3.5% decline in April sales last week.

"I only want to hear how May is doing," says Pisani. "The weather has been fabulous. There's virtually no excuses. If there's any sign of weakness in Wal-Mart's number, you can expect other retailers to announce discounting. Wal-Mart is going to be the first to comment...If Wal-Mart says May is going to be below plan, that's bad, bad, bad."

But we know a lot of stock traders these days always see the glass half full, so Pisani says a bull case could also be made if CPI shows tame inflation and Wal-Mart is weak. "If we get a benign trend in CPI, even if Wal-Mart's bad, it may be enough for the bulls to say that it would increase the chance of a Fed rate cut. The market could go up on that news."

Other data this week includes a look at the real estate market through Tuesday's National Association of Home Builders survey and Wednesday's housing starts and building permits. The Empire State Manufacturing survey is due Tuesday. Industrial production and capacity utilization are Wednesday, and Thursday brings jobless claims, the Philadelphia Fed survey, and leading indicators. The University of Michigan's consumer confidence is reported Friday.

Over a Barrel The energy markets are warily watching developments in Africa as Nigeria counts down to the May 29 transfer of presidential power from President Olusgen Obasanjo to Umaru Yar-Adua. On Friday, Chevron pulled workers from oil fields in the south of Nigeria because of increasing violence. This weekend, Nigerian labor unions called for a two-day strike to protest what they say was vote-rigging in last month's elections.

"The oil market will be focused this week on Nigeria, where post-election violence has now disrupted over a quarter of the country's production, especially with the attacks now extending to the off-shore and the evacuation of off-shore workers. The loss of this much oil is adding to the price pressures in the market and the pump prices that motorists are seeing in the United States," says Cambridge Energy Research Chairman Dan Yergin, CNBC's Global Energy Analyst.

Oil on the NYMEX was impacted by news from Africa last week, gaining 0.7% to $62.37 a barrel for the week. Crude is down 5.1% for the month, and up 2.2% since the beginning of the year. Gasoline, which we know is pinching at the pump, rose 6.1% on the NYMEX to $2.3521 per gallon.

"Nigeria is a pivotal producer for the United States. It is now just about tied with Venezuela as the fourth largest exporter to the United States, and it is one of the countries that should -- domestic conditions permitting -- register some of the biggest gains in oil output over the next several years. On top of that, it will be one of the major LNG exporters. But, as an influential Nigerian remarked this week, economic security in the Delta region is now important to American energy security," Yergin said.

Fed Heads Fed watchers will have plenty of opportunities this week to hear from a host of Fed officials, including Fed Chairman Ben Bernanke. This week is the Atlanta Fed's conference on credit derivatives in Sea Isle, Ga., and our Steve Liesman will be there, along with plenty of bank risk officers and representatives from the hedge fund industry. Bernanke addresses that conference Tuesday morning. There will be no question and answer session. "It's likely Bernanke will give a pretty major speech, possibly about the benefits and risks from the derivatives world," said Liesman.

Bernanke also speaks Thursday at the Chicago Fed's conference on subprime mortgage markets and regulation. Again, he will take no questions. Other Fed officials participating in the Georgia conference Tuesday include Boston Fed President Cathy Minehan; New York Fed President Timothy Geithner, and Fed Governor Fredric Mishkin. Philadelphia Fed's Charles Plosser and Fed Vice Chairman Donald Kohn participate Wednesday.

On Monday, Dallas Fed President Richard Fisher speaks on the U.S. service sector at a U.S.-China Business Council event in Washington. Fed Governor Randall Kroszner speaks in Argentina Tuesday on international capital flows and emerging markets economics, and again in Argentina Wednesday on globalization and capital markets.

Former Fed Chairman Alan Greenspan is speaking Thursday, and as ever, markets will listen to every tiny innuendo in his comments.

Merger Madness Over the weekend, the Wall Street Journal reports private equity firm Cerberus looks to be the leading contender in the bidding for Chrysler. This and a number of sagas will continue to be watched this week including the Chicago Mercantile Exchange-Chicago Board of Trade deal, Alcoa's efforts to buy Alcan, Thomson's bid for Reuters and News Corp.'s pursuit of Dow Jones. All this real action in the takeover world has led to a new silly season on Wall Street where any company that looks remotely like a target is the focus of a rumor that drives its stock higher.

Coinciding with this flood of rumor mongering were some very real and interesting new insider trading cases recently. There was the Hong Kong couple accused of trading Dow Jones before that bid was unveiled, a junior CSFB investment banker and his Pakistani banker, and two unrelated cases involving former Morgan Stanley employees and their spouses in other deals.

Because of his long and distinguished track record as a securities lawyer, we asked former SEC Chairman Harvey Pitt what he saw in these cases compared to the insider trading era of the late 1980s, immortalized in the movie "Wall Street." It was Michael Douglas's portrayal of Gordon Gecko, who espoused "greed is good," that personified the dark side of Wall Street in the late '80s. Then it was arbitrageur Ivan Boesky, Drexel junk bond king Michael Milken, and investment banker Dennis Levine who were under the prosecutor's spotlight. The prosecutor in that drama was played by none other than Rudy Giuliani. The defense in Boesky's case was Pitt himself.

Pitt says these latest cases show a surprising flow of confidential information up and down the hallways of the brokerage firms. "This is a wake up call to Wall Street," he said.

"One of the differences is that you have a lot of young people who didn't learn the lessons of the '80s...The second thing is information technology," Pitt said. "...Because the communication of rumors and information is instantaneous, a lot of people may be thinking they can outsmart the regulators."

"I think we're going to see greater use made of derivatives and other synthetic securities," said Pitt, adding that people think their activity in those markets is more easily masked. Certainly, there has been a great deal of funny trades in options ahead of deal announcements lately, as CNBC and other media have reported.

It's not hard to imagine that we'll see even more cases in coming weeks. "I think what the commission did in the Dow Jones case was extraordinary," says Pitt.

Earnings Central

In addition to Wal-Mart, earnings will be reported by Home Depot and Daimler-Chrysler Tuesday. Hewlett-Packard and Federated Department Stores report earnings Wednesday. On Thursday, JC Penney, Kohl's and Nordstrom report.

Around the World The White House says this weekend that the U.S. ambassador to Iraq will hold talks with Iran in Baghdad to discuss Tehran taking a productive role in Iraq's security. In Pakistan this weekend, deadly riots spanned two days and showed a deterioration in a crisis that started when President Gen. Pervez Musharraf suspended Chief Justice Iftikhar Mohammed Chaudhry in March over allegations he abused his office. Critics say the judge was independent-minded. Meanwhile, the Afghan government reported that Mullah Dadullah, a key military commander of the Taliban, was killed in a U.S.-led operation.