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Time to take stock of 2005

Los Angeles Times

It's a tough call separating the financial market highlights of 2005 from the lowlights. They often were one and the same.

Where to start? Maybe Jim Cramer throwing a chair across the CNBC studio?

The sound of millions of hands slapping anguished foreheads as Google Inc. shares topped &

36;200, then &

36;300, then &

36;400? D'oh!

The rise of activist money managers who, unhappy when a stock pick didn't pan out, inevitably offered the same cookie-cutter solution to company directors: Isn't this a great time for a share buyback?

Or perhaps the real highlight of 2005 was what didn't happen: There was no apparent financial-system or economic cataclysm, despite the double whammy of surging energy prices and the Federal Reserve raising short-term interest rates to a 4&

189; -year high.

— Here, in no particular order, is a look at some of the market memories we'll take away from this year:

They call him crazy, but they call him.

In a U.S. stock market short on excitement in 2005, CNBC-TV's Jim Cramer made his own.

The 50-year-old host of the financial network's Mad Money show (shown, in a typically pensive moment) used such props as animal grunts, plastic toys and flying chairs to make his point about stocks he liked or didn't like.

Detractors call this money porn, but viewers, either in the studio audience or calling in, seem to eat it up. Give Cramer a ticker symbol for any of 2,000 stocks and the former money manager will give you an instant opinion ' buy, sell, hold or boo-yah.

Say what you will about him (and people do), but in a year when the Dow Jones industrial average went virtually nowhere and when too many Americans' idea of investing was buying grossly overpriced real estate with time-bomb mortgages, Cramer got some people interested in the stock market again. There are worse crimes.

Internet Mania II, table for one.

Google gave investors who missed the dot-com insanity of the late 1990s a second chance to enjoy all the thrills, sleepless nights and bitterly jealous friends that accompany participation in a genuine stock craze.

The Web search giant's shares have soared from &

36;193 at the start of the year to the current &

36;430.93. They're up 407 percent from the initial public offering price of &

36;85 in August 2004. Is that overdone? The stock's fans see it as the Microsoft Corp. of this decade. And Microsoft shares, they remind, rose nearly 10,000 percent in the 1990s.

But this Internet mania is about Google and not much else. The Interactive Week index of 45 Net-related stocks is up a mere 3.6 percent this year.

Google may yet prove to be the greatest investment of its generation. Something will have to be, after all.

On the other hand, investors who rode the first Net stock mania from boom to bust and now own Google might want to remember that most ancient of Wall Street lamentations: Please, Lord, give me one more bull market, and I promise I won't be too greedy this time.

You take ours; we'll take yours.

Capital has never flowed as freely around the globe as it does today.

Foreigners spent record sums buying our stocks and bonds in 2005, snapping up more than &

36;1 trillion worth through October, according to Treasury Department data. Good thing too because we needed that capital to cover our likewise record trade deficit with the rest of the world.

At the same time, Americans have never been more eager to send their own capital abroad. In the first 10 months of the year, U.S. investors bought a record net &

36;127 billion of foreign stock and bond mutual funds, up 67 percent from the same period in 2004, according to Financial Research Corp.

contrast, U.S. investors' net purchases of domestic stock and bond funds fell to &

36;75.8 billion in the first 10 months, down 41 percent from a year earlier.

Both foreign and U.S. investors have good reasons for their financial preferences. It's in the interest of foreigners, especially foreign governments, to continue lending to us to fund our consumption of the goods they make.

For U.S. investors who ignored foreign stocks and bonds for most of the 1990s, this year's buying wave suggests a growing appreciation of the risk-reducing qualities of global portfolio diversification. It helps, certainly, that most foreign stock markets have been performing far better than the U.S. market in recent years.

The potential problem with this global money bridge is that its lanes are reversible. And if the capital flowing into the U.S. at a record pace were to suddenly flow out, the nation would be in a nasty pickle.

Yes, we've heard it all for years now: We consume far more than we produce. It can't go on. Yet it does.

That doesn't make former Federal Reserve Chairman Paul Volcker, for one, feel any better. As he wrote in a newspaper op-ed piece this year on the subject of U.S. dependence on foreign capital: Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember a lot.

We made a mistake. You fix it.

When a stock failed to rise this year ' or failed to rise as much as some of its antsy investors expected ' the solution typically recommended to company management by the unhappy owners was a share buyback.

In other words, if there weren't enough real buyers for a stock, hedge funds and other investors who felt stranded in the shares increasingly turned to the buyer of last resort to step up. And companies did just that, retiring stock at a pace that reached a record annualized &

36;446 billion worth of shares in the third quarter, according to Federal Reserve data.

A buyback can be a logical move, of course, provided a company has excess capital on its balance sheet ' and provided that its stock truly is undervalued.

But if the primary reason for a buyback is to please some hedge fund managers whose staying power in a stock is likely to be measured in months rather than years, genuine long-term investors ought to wonder whether their interests are being helped or hurt.

If the cash being shoveled into buybacks could be better spent expanding the company, today's generous buyback could be tomorrow's missed business opportunity.

The year's no-show: serious financial pain.

Historically, whenever the Federal Reserve has tightened credit significantly, bad things have happened to otherwise good economies and markets. The Mexican peso suddenly collapsed early in 1995, for example, after the Fed doubled U.S. short-term interest rates in 1994, undermining the Mexican economy.

Another casualty of that credit-tightening cycle was Orange County. It plunged into bankruptcy after its treasurer effectively loaded up at the interest rate roulette wheel with a leveraged investment bet against higher rates, using so-called derivative securities in the county's portfolio. He'll always be remembered as Wrong-Way Bob Citron.

This time, the Fed has raised short-term rates to 4.25 percent from — percent in 18 months, a dramatic increase by any stretch. Alongside the jump in rates, oil and natural gas prices have reached record highs.

So why no serious blowups in the economy or financial system? Where is the Bob Citron of this decade?

Many Wall Street veterans offer a simple reason that the Fed's campaign hasn't resulted in any Orange County-like disasters: This time, the Fed was about as outspoken as it could be in warning that higher interest rates were coming.

What's more, everybody knew the central bank would go slow. Its code phrase was measured pace ' a quarter-point higher at each Fed meeting, meaning every six to eight weeks. That pace gave investors and speculators a chance to buffer their portfolios against higher rates.

Why the economy has withstood soaring energy prices so well is more of a puzzlement. Economic optimists say it's a testament to U.S. companies' intense focus on productivity and to the resiliency of American consumers.

Maybe. But there also is a risk that the unwelcome guests of financial and economic turmoil simply are late to crash the party this time ' the story for 2006 rather than 2005, perhaps as many more of those low-money-down, — percent teaser-rate adjustable mortgages start charging a real interest rate.