NEW YORK (MarketWatch) -- U.S. stocks traded mixed Monday, the start of the second quarter, after a key economic report revealed a continued slowdown in manufacturing alongside rising producer prices, offsetting the early boost from a raft of merger news, including a $29 billion leveraged buyout of First Data Corp.
After a positive start, stocks turned lower with the release of the Institute of Supply Management's March manufacturing index, showing a fall to 50.9% from 52.3% in February, below the 51.8% expected by Wall Street economists. A reading above 50 indicates the sector is still growing, but at a sluggish pace.
"We came in on a positive note about mergers and another private equity deal, which means there's still a lot of money out there," said Art Hogan, chief market strategist at Jefferies.
"We then got a slight disappointment on the ISM number," he said. "But we're starting a new quarter with a fresh outlook and investors are waiting for earnings to kick in."
The Dow Jones Industrial Average was last up 14 points at 12,368 after earlier falling to a low of 12,324 and rising to a high of 12,391. Rising shares on the Dow included Altria Group Inc. , which gained 3.2% as it started trading separately from Kraft Foods Inc. . Also, Merck Co. Inc. gained 2.2%.
The Dow was still under pressure from its financial components American Express Co. , Citigroup Inc. and JP Morgan Chase & Co. .
Among other blue-chips, AT&T Inc. surrendered early gains to trade down 0.4%. AT&T and Mexican wireless operator America Movil said they were in talks to buy a stake in Telecom Italia . Telecom Italia shares were up nearly 10%.
The broader telecom sector was weighed down after Nokia-Siemens, a venture between Nokia Corp. and Siemens AG , said there were signs of a slowing in equipment spending over the last few months, resulting in a downgrade of its 2007 industry-wide spending forecast.
The S&P 500 index rose 1.16 points to 1,422.02, while the Nasdaq Composite lost 7 points to 2,414.
Among technology shares, Apple Inc. gained 0.5% after it reached a deal with EMI to make music available without antipiracy software. Higher-quality tracks from EMI will be available at $1.29 instead of 99 cents for regular tracks on Apple's Itunes.
Trading volumes showed 866 million shares exchanging hands on the New York Stock Exchange and 1.07 billion trading on the Nasdaq stock market. Advancing issues topped decliners by 17 to 12 on the NYSE, while decliners led gainers by 15 to 12 on the Nasdaq.
By sector, banks , broker/dealers and semiconductors fell, while technology services , natural gas and oil services were among the biggest gainers.
New quarter, same problems
Stocks had opened on an upbeat note after yet another huge private-equity deal.
Kohlberg Kravis Roberts agreed to buy First Data for $34 a share, a 26% premium to Friday's close. First Data said it will try for 50 days to find another bidder. First Data was up 21%.
The proposed leveraged buyout helped to reassure investors, at least temporarily, that financial liquidity has not yet dried out and can still fuel market gains.
Shares have been volatile since the end of February as a meltdown in the subprime mortgage market fueled concerns that lending will subside, further hurting the housing market and weakening an already slowing U.S. economy.
Monday's weak manufacturing report did little to soothe those concerns.
Investors are also worried that some companies may start lowering their earnings outlooks this week to reflect a slowing economy, as the first-quarter earnings season looms.
"The next big inflection point for the market will be how corporate America is doing," said Jefferies' Hogan. "This will be the first in 14 quarters that we won't get double-digit earnings growth, and we'll have to see how the market reacts to that."
U.S. stocks finished a volatile Friday on a mixed note, mirroring a likewise volatile and mixed performance in the first quarter, which has left the Dow industrials in negative territory for the year, while other indices held on to meager gains. .
Joining concerns about subprime and earnings on Monday, shares of M&T Bank Corp. fell 8% after the Buffalo, N.Y.-based bank warned that trouble in its subprime residential mortgage segment will cut first-quarter net income to $1.50 to $1.60 a share. Analysts polled by Thomson Financial expected the bank to earn $1.86 a share.
Also, troubled subprime lender New Century Financial said it has filed for Chapter 11 bankruptcy, and said it will cut its workforce by over 3,200, or 54%, effective immediately. The stock, which trades over the counter, fell 13% to 93 cents.
The news kept pressure on financial stocks, offsetting a boost from a Goldman Sachs upgrade of Merrill Lynch to buy from neutral. The broker said a sell-off in Merrill shares over subprime mortgage concerns has been overdone. Merrill was up 1% at $82.48.
The firm also downgraded Jefferies Group Inc. to neutral from buy. Jefferies fell 3%.
"If we allow our eyes to refocus upon the US economy, the housing debate continues to rage," said Paul Nolte, director of investments at Hinsdale Associates, in a note.
Questions about the impact of subprime and housing on the economy continue to keep investors on edge, he said. "And to top it all off, earnings season will be starting in a couple of weeks."
Still, he said this week "will be all about the economy," especially the key employment report due out on Friday.
Adding to ongoing concerns about pressure on consumers and the economy, crude oil prices surged past $66 a barrel last week amid ongoing tensions between the UK and Iran, the world's fourth largest crude oil producer.
Crude oil was last up 45 cents at $66.32 a barrel.
Gold futures rose $2.20 to $671.20 an ounce.
The dollar was slightly weaker after the ISM data. Earlier, the Bank of Japan's quarterly Tankan survey of business sentiment showed confidence among large manufacturers declined more than expected in March. Also, the euro-zone manufacturing PMI slipped to 55.4 in March from 55.6 in February.
Sam Zell won a bidding war to buy Tribune Co. in a multi-billion dollar deal.
Xerox agreed to buy Global Imaging Systems for $1.5 billion, or $29 a share. The news sent Global Imaging shares soaring 47% to $28.70 ahead of the open.
AirTran Holdings upped its hostile offer for Midwest Air Group to $389 million, or $15 a share.
Elsewhere, the chief executive of Starwood Hotels & Resorts Worldwide , Steven Heyer, resigned on Monday after a boardroom clash, though the hotels group insisted his departure isn't performance related and reiterated earnings guidance. Starwood said its chairman, Bruce Duncan, will become interim CEO.
By Nick Godt