A holiday-shortened week didn't provide much of a holiday for the stock market, which posted its third straight losing week of the new year. Despite some good earnings news from a few biggies like IBM ( IBM) and Yahoo! ( YHOO), the Dow Jones Industrial Average lost 1.6% for the week to close at 10,392.99 and the S&P 500 lost 1.4% to close at 1167.87. The Nasdaq Composite, battered by weak results from Internet bellwether eBay ( EBAY), dropped 2.6% to 2034.27. After the three down weeks, at least some analysts are starting to see signs of a bottom forming. Jim Kelleher, associate director of research at Argus, said rising volatility indices and the increasing put/call options ratio along with some investor surveys indicate a dramatic rise in bearish sentiment. "The bulls have disappeared," Kelleher wrote on Friday. "We will welcome them -- and their cash on the sideline -- back at a future date." Amid the earnings reports and macroeconomic data, there were some warning signs about the health of the consumer. Friday's initial reading on consumer confidence in January from the University of Michigan was below expectations, falling to 95.8 from 97.1 in December. Saggy stocks, violence in Iraq and other maladies may be getting folks down. There also was evidence in the earnings reports of some consumer lenders that all is not well.
ARMs and the Consumer
Even as the Federal Reserve ratchets up short-term interest rates, adjustable-rate mortgages (ARMs) continue to grow in popularity. Partly, this is a reflection of the decreasing affordability of homes. Over the past year, the benefit from taking out an adjustable-rate loan compared to a fixed-rate loan has declined but the popularity of the loans has increased. At Washington Mutual ( WM), ARMs represented 68% of loans in the fourth quarter, up from 67% in the third quarter and 48% a year earlier. That hurts profitability as well -- profits dropped 21% vs. a year earlier -- but positions the bank better for the coming rise in rates. Fixed-rate loans on the balance sheet decline in value when rates rise, while floating-rate loans are less affected.