Hedge funds have a difficult time beating the markets due to the egregious fees it charges. Typically, hedge funds charge a flat 2% for admin expenses and 20% of the earnings. So if the fund earns 10% gross, the investor will pay 4% in fees, which results in a real return of 6%. Even if hedge funds earned 15%, investors would only garner 10% after the fees.

Of course, if you include taxes, which you should, this will be even lower. These hedge managers tend to have enormous turnover in their funds. Anytime a fund manager buys or sells a security it creates a taxable event. I have seen studies where the total return of hedge funds after expenses and taxes is equivalent to a money market fund. Yet, the risk in the funds is huge as many hedge funds deploy massive leverage - often ten times the account value.

Yesterday, GM announced it was shutting down four plants that build SUVs and other gas hogs like the Hummer. In fact, GM might kill the Hummer brand altogether. GM went on to say that they are focusing on battery operated autos again. This was technology they developed in the 90s, but it was held down due to political reasons (if you want the full scoop, check out the independent film “Who Killed the Electric Car”)  While this is certainly painful for those who will lose their jobs as the plants close, it is a positive for weening us off of oil. Again, if oil stays high, GM will stick with its plans to build these electric cars.

What most people fail to understand is we poured tons of money, time and research into alternative energies and mass transit in the early 70s when we had our last gasoline crisis - the oil embargo. However, once the embargo ended and gas prices retreated, these technologies didn’t receive the necessary funding to become viable. It was much cheaper to use fossil fuels and drive to work, rather than take mass transit. If gas stays at $4 a gallon, all of these alternatives could become price competitive. We could have a truly expansive mass transit network. We could drive to work in a battery operated vehicle with zero emissions. We might power our homes with solar, wind or even nuclear energy - all clean energy sources.

This will also help us reduce our dependence on the Middle East. The vast majority of our international issues are related to this area. As we pull out of this area, we will find that the anti-American stances will soften. It will be hard to hate us if we are not a presence in their lands. And believe you me, if we weren’t importing their oil, we wouldn’t have anything to do with that area, except for assistance to Israel. And frankly, Israel would probably be better without us. We have held them back if anything.

As I inferred above, another benefit is the clean technologies that would be developed. Regardless of where you stand on the global warming issue (man made or natural), no one can dispute that carbon dioxide emissions worsen the situation. These cleaner technologies will reduce carbon emissions, which will hinder any worsening of the global warming situation.

So $4 a gallon for gas might create a situation where alternative technologies and commuting options are price competitive with oil. This will help reduce global warming as well as reduce our external threats of terrorism.  Maybe you won’t mind paying the higher prices the next time you are filling your tank at the gas station.

My theory is the baby boomers are hurting because for some illogical reason they believe retirement will be taken care of like it was for their parents. The WWII generation mostly retired with pensions and had some savings. Despite the fact that pensions are rare, even for boomers, they tend to live their lives as if they will get a pension - even if there is no chance of it. Maybe they think social security will pay for retirement. If so, they are in for lean retirement years. With Gen X, there are those of us who understand that retirement is on our shoulders. We mistrust Social Security, and we know there are no pensions. The other half seem to follow their boomer parents in believing retirement will take care of itself. These folks tend to consume more, like the Boomers, and they are in debt. They have nice stuff: big house, new cars, electronic gadgets up the ying yang. But, they need to understand that they are on their own when it comes to retirement. And, we don’t have as much time as we think to begin saving.

Overall, our generation is not the slackers that we are portrayed. We have built solid careers, and most of us are dedicated to saving and investing.

I have stated several times that these agencies such as Moody’s, S&P, Fitch, and McGraw Hill have gotten off lightly amidst the subprime finger pointing. While most people point at Alan Greenspan, corrupt mortgage brokers, greedy investment bankers, or incompetent home buyers, the rating agencies could have prevented this entire mess had they properly rated these instruments, rather than giving them AAA ratings.

I smell an SEC investigation in the horizon.

This is welcomed news in the muni bond world. The municipal market has been struggling lately. With the troubles at MBIA and AMBAC leading to a possible downgrade of many munis credit rating, the loss of tax privileges would have really hampered the market. This is also good news for investors. Taxpayers can still shelter money from taxation from federal and state governments. In fact, this is a tri-fecta. It is great news for states as well. They would have been forced to offer higher yields to attract investors if the investor lost the tax benefits.

Since the economy is at least slow, maybe even recessionary, I expected this year to be a big year. I thought the strapped consumer might come out to the garage sale, rather than the shopping malls. Plus, the weather was beautiful. But, it was the worst year yet. We barely sold anything, and we had some really nice items this year.

I am wondering if this is a further sign of a recession or was it just a bad weekend.

The P/E or price to earnings for the market is the overall market capitalization (or total value of the market) divided by the total earnings for the companies in the market. The historical average is just north of 14, but since 1960 it has been closer to 17. Currently, it stands above 25 as the graph below shows.

On a historical basis, the market still seems a bit pricey even with the recent drop. It doesn’t mean that we will see a bear market or large decline. In fact, the market could shoot up 30% this year. However, it probably indicates we should expect a lower return for the next few years. How low you ask? Well, Jeremy Grantham of GMO asset management did a study where he examined the P/E ratio at the beginning of each year since 1925. Then he recorded the return for the next ten years. From that, he was able to categorize the data into five quintiles from the lowest P/E ratio to the most expensive. His results are below.

As you can see, we will probably see returns for the next ten years around 5% per annum. From year to year, this will fluctuate, but over the next few years, it is hard to make a case for double digit returns. Of course, there are markets that will experience these kind of returns if the US stock market doesn’t, which we don’t know that it won’t. Remember, markets are unpredictable. So diversification will ensure you capture good returns regardless of which market is a bull.