Wednesday's stock market was dominated by bad news from the bond market. Yields on the benchmark 10-year U.S. Treasury rose from 5.09% to 5.15%, and the Dow Jones Industrial Average fell 1.1% to 13,489. Investors are worried that rising rates will dampen merger and acquisition activity, especially since private equity buyouts have been a big driver behind the stock market's strength in 2007. Higher costs of capital tend to put a lid on M&A, so investors are concerned that stubbornly high inflation will eventually translate into higher rates, fewer buyouts, and a lower stock market.

This hurt brokerage stocks, which profit from deal making. Brokers also felt the pain from hedge fund problems at Bear Stearns (BSC | charts | news | PowerRating). Two hedge funds at Bear Stearns have assets linked to mortgages, and prices are slumping due to higher rates and rising defaults in the subprime market. There were reports early Thursday that Merrill Lynch (MER | charts | news | PowerRating) is selling over $800 million of collateral from these funds at fire-sale prices. Two other brokers had offered to work on a rescue plan for Bear Stearns: Goldman Sachs (GS | charts | news | PowerRating) and J.P. Morgan Chase (JPM | charts | news | PowerRating). But Merrill's actions could force all of the bankers to Bear Stearns to mark their assets to market, putting further pressure on these distressed hedge funds. ("Mark to market" means that the banks will have to use current prices for these mortgage securities. The drop in real estate prices means that the value of the assets at these hedge funds will be "marked down" to current prices.) The damage even extended to discount broker Charles Schwab (SCHW | charts | news | PowerRating).

As a result, shares of brokerage stocks fell sharply on Wednesday. These are part of the Investment Brokerage-National industry, which has a PowerRating (for Industries) of 5. Our quantitative data from 1995 through 1996 has shown that high PowerRatings do an excellent job of highlighting industries that are poised to beat the market on an annualized basis. The highest PowerRating is 10, so the brokerage industry is in the middle of the pack.

Despite the decline on Wednesday, two of these stocks have attractive PowerRatings (for Investors). J.P. Morgan Chase and Goldman Sachs both have a PowerRating of 8, which is attractive. These ratings are a valuable tool for investors interested in growth and safety, and historic results show that stocks with high PowerRatings have outperformed the market averages.

Home Depot Bucks the Trend

Home Depot (HD | charts | news | PowerRating) shares rose 4.6% to $40.03 on Wednesday. The stock had been up well over 6% during trading on Wednesday, but the shares eased in the afternoon as the stock market slumped. Trading volume for Home Depot shares was five times normal levels.

Home Depot surged after the firm announced that it will buy back $22.5 billion in stock. This is about 30% of the company's market capitalization, based on closing prices on Tuesday, prior to the announcement. This is one of the largest stock repurchase programs for any company in the S&P 500. Home Depot also announced that it is selling its Home Depot Supply business for $10.3 billion. This would finance about half of the stock repurchases, with the balance coming from operations and from the issuance of new debt. Stock investors cheered, sending HD shares soaring. But bond investors are not so happy with the extra debt on the way, and the major credit rating agencies issued warnings about Home Depot's credit rating.

The stock has a PowerRating (for Investors) of 8, which is an attractive rating. But we caution that the Home Improvement industry has a PowerRating (for Industries) of 1, our lowest rating. Investors should consider this carefully before making a purchase of any stock in the industry, including Home Depot.

Rob Martorana is Director of Content for PowerRatings.net.

Rob was most recently at TheStreet.com as the Director of Content for Professional Products. Robert has spent 22 years on Wall Street, and was a portfolio manager and head of U.S. equity research at Barclays Private Bank. Robert also managed small-cap stocks at Schroder Capital Management International, was an equity analyst at Vontobel USA, and was an editor and senior industry analyst for The Value Line Investment Survey.

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