In 2000, thrift stocks ceased being wallflowers and started to rumba.
Marked as safety nets for credit problem-averse investors and boosted by interest-rate stabilization, thrift companies as a group handily outpaced the S&P 500 and both American Banker bank stock indexes. 
But could the party be winding down just as it really got going?
Along with the traditional broken New Years resolutions, 2001 is expected to bring interest rate cuts maybe as many as six, some market observers are speculating. For thrifts with large adjustable rate mortgage portfolios, such as the big West Coast institutions Washington Mutual Inc., Golden West Financial, Golden State Bancorp, and Downey Financial Corp., that could mean trouble.
As a rule, adjustable-rate lenders can get hurt during an interest-rate cut if it becomes cheaper for homeowners to take out fixed-rate mortgages. Consumers decisions to refinance their ARMs, often with new loans from other companies, hit the thrifts balance sheets. That is what happened in 1998, when plunging fixed-rates put many thrifts in a tight spot.
Whether these lenders will be hurt by a rate cut is an open question, said Paul Miller, an analyst with Friedman Billings Ramsey & Co. The problem only arises when assets start rolling off the balance sheet and origination slows, he said.
Thrift companies are likely to be hurt by rate cuts, if indeed there are any, caution analysts and investors. As their cost of funding shrinks, mortgage lenders should experience expanded margins that have a direct result on their bottom line. That means investors are likely to keep buying thrift stocks as the Fed cuts interest rates, as they seek to take advantage of the initial positive effect of these rate cuts.
If theres a rate cut youll see the momentum investors, said Carl Dorf, portfolio manager for Pilgrim Bank and Thrift Fund, part of the ING Pilgrim Investments family of funds. Thats when the group gets overvalued, he said.
Indeed, despite the healthy gains in earnings at many thrift companies last year, Wall Street still sees room for earnings estimates to rise beyond what is currently expected.
According to Thomson Financial/First Call, the 2001 earnings-per-share consensus estimate on Washington Mutual rose by 14 cents over the last two quarters, to $4.14. The estimate for Golden West Financial increased by 34 cents, to $4.20.
The downside to an interest rate cut would come later, maybe as late as six months into the year, when thrift balance sheets start to show the effect of a refinance boom that is already under way.
Im not hitting the panic button, Mr. Miller said.
Still, there is a laundry list of reasons why thrifts maintain large adjustable-rate mortgage portfolios. Topping the list is the perception that ARMs offer a safe alternative to nonperforming or charged-off corporate loans.
Some, particularly Washington Mutual, have been busily diversifying their revenue mix by expanding their fixed-rate mortgage activities.
And there are other variables.
If you believe, as I do, that short rates are going to come down more than long, the scenario will be better for adjustable-rate lenders, said Bruce Harting, an analyst with Lehman Brothers.
The Federal Reserve Boards aggressiveness will also play into how these companies perform in the new year. A series of interest rate cuts could stave off the exodus of loans from adjustable-rate portfolios.
For adjustable-rate mortgage lenders, its a perception of where interest rates are going to go, said Mr. Miller. The American Banker index of the top 25 thrifts closed up 1.28% Friday, in a week that analysts said was marked by yearend profit-taking.
