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.

At Golden West ( GDW), an adjustable-loan specialist, profit rose 16% in the fourth quarter. Virtually all of its loans in the fourth quarter were ARMs, as they were a year earlier.

Wells Fargo ( WFC), another big mortgage lender, saw its profit rise 10%, but growth was lagging in the mortgage unit. "Most" of the $3.3 billion of new consumer loans in the quarter was from adjustable-rate products. The bank saw substantial growth in its first- and second-mortgage lending businesses, but a 34% drop in its much larger home equity loan area.

With mortgage rates having already bottomed, refinancing volume is slowing dramatically. With mortgage refinancing the biggest source of consumer liquidity in recent years, the end of the refi boom could force consumers to become more frugal.

"In a climate of subpar income generation -- with the current recovery in private-sector real wage and salary disbursements falling 10 percentage points short of the cyclical norm -- U.S. consumers have been quick to extract 'extra' purchasing power from their asset holdings in order to keep on spending," Morgan Stanley economist Stephen Roach noted this week.

Unless income and job growth pick up, that will put pressure on the beneficiaries of consumer spending, especially retailers and home prices (no sign of that yet -- The San Francisco Chronicle reported that prices in that city rose 17% last year).

And that means, according to Roach, that further Fed rate hikes, which are on tap to keep coming at a "measured" pace as far as the eye can see, may have more impact on the economy than in the past. The longer the Fed waits, the more dangerous the end game.

Requiem for a Heavyweight

The quest to modernize the U.S. banking industry lost one of its biggest stars this week when former Citigroup ( C) chairman Walter Wriston died of pancreatic cancer.

Wriston was strongly against state and federal laws that prevented banks from expanding into other lines of business and across state lines at a time when many bankers considered the limits a sweet protector from competition.

He was responsible for many innovations that pushed Citi to the top of the heap, including setting up the first bank holding company to get around state limits; widespread installation of ATMs; and several new twists on certificates of deposit. He also used a massive 1977 nationwide credit card solicitation, the first of its kind, to expand the bank's reach, realizing that consumers didn't know or care what bank issued their Visa card.

Wriston made plenty of mistakes along the way, as default rates on that first blitz of credit cards were much higher than anticipated and his push into third-world lending almost erased his legacy by pushing the bank toward bankruptcy. "A country does not go bankrupt," he famously -- and wrongly -- declared defending the loan initiative.

Fortune editor Joe Nocera paints a fascinating portrait of Wriston in his book A Piece of the Action. Hard-charging and straight-talking, Wriston dared to hire consumer marketing experts who knew more about breakfast cereal than interest-rate spreads.

There shouldn't be any irony, then, that it was Citibank's 1998 purchase of Traveler's that virtually forced Congress in 1999 to overhaul the Depression-era Glass-Steagall Act and allow banks to get into the insurance and brokerage business directly.

Although Wriston was long gone -- he retired from Citi in 1984 -- he must have been pleased that the institution he helped create was the catalyst for the legislation.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback.

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