Mark Zuckerberg, CEO of Facebook (FB) and Rich Kinder, CEO of Kinder Morgan (KMI) would appear to have little in common (though they are both billionaires). However, they share one thing in common in that both recently made transactions in their own stock.

FB has ‘A’ and ‘B’  shares, whose rights are identical other than ‘B’ shares have 10 votes each and can be converted 1:1 into ‘A’ shares. Mark Zuckerberg is exercising an option to buy 60 million B shares and then converting them into ‘A’ shares prior to selling 41.35 million in an upcoming secondary offering.  He says he’ll use most of the proceeds to pay taxes but will still wind up controlling 56.1% of the voting power (compared with 58.8% before the sale) and will have greatly reduced his tax liability since he’ll net $2.2 billion pre-tax with virtually unchanged ownership. On top of which he’s inflicting video commercials on FB users. I am (barely) still a user, but assiduously ignore any advertising.

Meanwhile, Rich Kinder recently spent $27 million buying shares in KMI, bringing his holdings to 231 million worth about $8 billion. You can invest alongside Rich Kinder, but you can’t buy the ‘B’ shares that Zuckerberg owns. Who would you rather be in business with? We own KMI.

We’ve written before about the benefits of being the General Partner (GP) in a Master Limited Partnership (MLP) rather than a Limited Partner (LP). MLPs are a great asset class; the more stable, midstream businesses that invest in energy infrastructure operate a toll-type of business model with fairly predictable cashflows. Their 5-6% distribution yields are largely tax-deferred and generally grow anywhere from 4-5% and higher, annually. One of the disadvantages of investing in MLPs (beyond the K-1s) concerns the very weak corporate governance afforded LPs. The GP runs the business on behalf of the LPs, and it’s virtually impossible to fire an underperforming GP no matter how many LP units you hold. You don’t see activist hedge funds buying LP units for that reason. The GP potentially has substantial power to act in ways that are not always in the interests of the LPs. For example, since the GP earns a chunk of the Distributable CashFlow (DCF) an MLP generates (often as much as 50%) they benefit from increasing the DCF. LP unitsholders want that too, but acquisitions funded by a secondary offering of LP units and debt will always benefit the GP. They’ll benefit the LP only as long as the return on the new capital exceeds its cost (i.e. is not dilutive). The GP can benefit even from a dilutive offering, since he never gets diluted. The trick is to treat the LPs just well enough that the price of LP units stays high enough to support that next secondary offering of stock.

Which brings us to hedge fund managers, whose role is in many ways similar to that of a GP in an MLP. New assets raised by a hedge fund manager may not hurt returns for existing investors if sufficient investment opportunities exist to deploy the additional money. New assets will ALWAYS benefit the hedge fund manager though, because he’ll earn fees on those assets. No doubt many hedge fund managers look in awe at the economic enjoyed by an MLP GP. Hedge Fund managers, with their 20% incentive fee and limited ability to abuse their LPs, can look in envy at the 50%” earned by an MLP GP.

This has not escaped the attention of Keith Meister, manager of Corvex Management LP, a hedge fund manager. Corvex filed a 13D this morning disclosing an investment in Williams Companies (WMB), in partnership with another hedge fund manager called Soroban Capital Partners run by Eric Mandelblatt. WMB is the GP for Williams Partners, LP (WPZ). Corvex and Soroban together own 8.8% of WMB through shares and unexercised options. The 13D includes a list of issues they’d like to discuss with the board of WMB, most interestingly, “…participating in strategic combinations given the rapid pace of consolidation in the midstream energy industry.”

WMB’s investor presentation includes a forecast of 20% annual growth in dividends from over the next few years, driven in no small part by their GP stake in WPZ (they expect the Incentive Distribution Rights, or IDRs, to grow at 30%). WPZ itself is forecasting 6%. But this need not even be the Upside Case; WMB could, for example, sell the 279 million units of WPZ it owns and use the cash to buy back WMB shares. They could use their WPZ units to acquire other assets and then drop them down into WPZ. They could even buy an MLP that had no GP and then drop the underlying assets into WPZ where their cashflows would then be subject to the 50% IDR split. There are numerous other, possibly more imaginative steps.

We have no idea what Meister and Mandelblatt have in mind. We have long owned WMB because we like their prospects. The involvement of an activist raises the possibility of faster wealth creation for WMB at the expense of WPZ.

Quite recently, Keith Meister abruptly sold his position in ADT, a company we owned. We wrote about the “Corvex Discount”. Based on his past, Corvex could switch gears and dump WMB. It may be an obvious statement, but following other investors into positions is not a great model. In our case we’ve owned WMB a long time, since we much prefer the GP side of the MLP story to the LP one. We are also short WPZ. We think it’s vulnerable to wealth creating moves at the WMB level as described above.

Aubrey McLendon is the former CEO of Chesapeake Energy (CHK). He’s a swing-for-the-fences kind of CEO; he almost bankrupted himself with leveraged holdings of his company’s stock when it plunged in 2008. In 2011 Forbes named him America’s most reckless billionaire. He famously negotiated a sweetheart deal allowing him  to personally invest in individual wells drilled by the company. Earlier this year he was forced out by Carl Icahn. McLendon no doubt has many talents, but a strong sense of fiduciary duty is not among them.

American Energy Capital Partners, LP is McLendon’s new venture. It recently filed for a $2 billion IPO. American Energy is sponsored by American Realty Capital, run by Nicholas Schorsh. Schorsh is also the backer of Inland American Realty, an unlisted, registered REIT. We wrote about Inland American in June. It’s not clear why a company would be registered but not listed. Being registered allows sales to the general public, while not being listed means there is no public market to allow investors liquidity to sell. No public market liquidity means there is little incentive for sell-side form to provide research – which in the case of Inland American was a good thing because their IPO included numerous conflicts and up to 15% of your invested capital as fees. Their REIT has performed miserably since then.

McLendon and Schorsh have both demonstrated a facility for placing their own interests ahead of their investors. It seems especially appropriate that they have joined forces in this new partnership.

The Economist turned its critical eye at quantitative hedge funds recently, noting the poor performance of such “black box” strategies since the 2008 Financial Crisis. The article’s headline (“Computer Says No”) is a wry reference to a British sitcom called Little Britain, a humorous touch that will have been missed by many U.S. readers.

Quant practitioners predictably note the absence of rational markets (isn’t that ALWAYS why managers lose money) and place the blame squarely at policymakers and artificially low interest rates as the reason their models can no longer make reliably profitable predictions. It may also be that this sector of the hedge fund business is overcapitalized, with assets having grown from $91 billion to $215 billion in four years. While the underlying markets such as equities and bonds offerplenty of liquidity, perhaps the inefficiencies such algorithms are meant to identify are being competed away, at least by the big ones.

You had to watch 60 Minutes on CBS to know what an octocopter is, but after watching Jeff Bezos discuss Amazon and some of their plans I just love Amazon as a customer! I buy things from them probably every other day. My recent orders include:

New battery for my Samsung Galaxy smartphone

Toner cartridge

Dog Muzzle (our dog broke his foot and was gnawing the bandage)

Altoids (12 pack, cheaper unit price than WalMart)

About six books by Vaclav Smil, a prolific writer whose writing combines engineering, economics and history on topics such as Oil or U.S. manufacturing

This is in the past week or so. Their delivery is already pretty fast (and Amazon Prime makes it feel as if it’s free). And the fact that my credit card is stored on their website means I can order things over breakfast without having to get my wallet. But the thought of helicopter drones (called octocopters because they have eight propellers) delivering a package within 30 minutes is straight out of the future. It’s exciting to watch Amazon become the online marketplace for EVERYTHING.

I LOVE being their customer.

Jeff Bezos admitted he’s very patient about making profits (hasn’t he always been so?). That’s even better news if you’re a customer; they put us first. While Bezos believes many companies think in terms of profitability within 2-3 years, he’s willing to wait 5-7. That’s even better news. I’m so happy being their customer there’s just no chance I’ll spoil our wonderful relationship by becoming an investor too.

A year ago Corvex, a hedge fund run by Keith Meister, published a detailed analysis of why ADT was a cheap security. ADT is the largest market leader in home security monitoring in North America. They were spun out from Tyco earlier in 2012. Meister identified an underleveraged balance sheet supporting a business model with highly recurring revenues well positioned to grow through accretive acquisitions of smaller players. In addition, increasing ADT’s leverage and using the funds to buy back stock looked like a good way to return value to shareholders.

Corvex took a 5% position in ADT and Meister joined the board. It took a while, but by the Summer ADT seemed to have taken Meister’s advice to heart since they increased their stock buybacks and in September issued $1 billion in debt in part to fund their buyback program. But evidently Meister’s view from his position on the company’s board was no longer as positive as it had been in late 2012, when he assessed a Downside Case for the stock at $43 and an Upside Case of $63. At the time of his presentation in October 2012 it was trading at around $38. Last Friday it closed at $44.01.

On the weekend ADT announced that it had agreed to buy Corvex’s 5% position back at Friday’s closing price, and that Meister was resigning from the board. There’s no way of knowing why Corvex suddenly exited its position, but in the poker game that took place between ADT’s CEO Naren Gursahaney and Corvex’s Keith Meister over the pricing of this trade, there’s little doubt that Gursahaney’s naivete was fully exposed. Clearly a sale of 10.24 million shares of ADT, particularly when combined with the resignation of a director who was up until then clearly focused on shareholder value, should have taken place at a steep concession to the closing price. Meister understood this. Gursahaney did not. The consequent 5.8% drop in ADT’s stock price was in response to this news. A more shareholder-oriented CEO, or a better negotiator, would have been less desperate to rid the board of Meister, but ADT instead destroyed at least $26 million of value for the company by overpaying for its shares.

We owned ADT ourselves and would have at least liked the opportunity to make the same sale as Corvex with the same information, but equal treatment was not afforded to all the other shareholders. Activists are most definitely a two-edged sword in financial markets. They are by nature short term in orientation, so their claims to represent the interests of shareholders against intransigent management may not always be genuine. Some CEOs can add value to a company by resigning (such as Steve Ballmer from MSFT). In some cases, an activist investor can reduce the value of a security through its presence. Since Corvex can so quickly turn from pro-shareholder activist to opportunistic short term value extractor, the Corvex Discount might now reasonably exist on any security in which they have an interest. Just another hedge fund seeking a quick profit. He was a fiduciary to ADT’s shareholders until he suddenly wasn’t. His hedge fund clients might take note.

So says the Wall Street Journal in an article this morning announcing that Investors See End To Bond Rally. Of course the real problem with fixed income is not just the eventual tapering of asset purchases by the Fed, maybe sometime next year under Janet Yellen or maybe beyond that. It’s that yields don’t provide any return to compensate even current inflation never mind the possibility of it one day rising.

The WSJ notes that U.S. taxable bond funds currently hold $3.8 trillion. It’s hard to believe but in 2000 the figure was $720 billion, so whether that counts as a bubble or not, it’s certainly looks like a collective overweight to this particular asset class. And the sorry Math of fixed income is that if you hold a ten year treasury security yielding 2.7% and in a year’s time ten year yields have risen to 3.1%, the loss on your holdings will offset the interest income; Total Return = 0. This is a reasonably likely prospect for trillions of dollars of invested capital. After taxes and inflation, it’s a 2-3% loss in purchasing power, around $75-115 billion in losses. The math is similar for shorter maturities where yields are even lower, and owning high grade corporate bonds doesn’t alter the outlook much either. So far bond returns in 2013 are an example of what investors will likely face for many years to come.

Since diversification is good, investors should diversify away from fixed income. When you hear a bond manager say they’re focused on sectors of the market where prospects are better, or that bonds are still an important source of stability, run the other way. You’ll be better off holding more cash than you might otherwise like, since cash has a good chance of beating bonds, and lean on the stability provided by cash to own more equities than you might otherwise. The Fed doesn’t want you in fixed income.

This weekend’s Economist discussed Master Limited Partnerships (MLPs). Their Leader article primarily focuses on the different forms of corporate structure that are developing both to minimize corporate taxes as well as in response to legislation such as Sarbanes-Oxley which raised the cost of compliance (disproportionately for smaller firms) for many traditional corporations.  It’s interesting to see The Economist probing a relatively unknown segment of the capital markets, but as usual they bring their clear-headed analytical skills to bear and pose some thought-provoking questions such as the absence of a public policy debate over a shift away from the traditional corporate, or “C-corp” structure widely used.

MLP investors have done well, and the requirement that profits be substantially distributed to owners rather than accumulate via retained earnings as management’s piggy bank hardly seems a bad idea. Investors in Microsoft (MSFT) and Apple (AAPL) might well wish that those companies were structured as MLPs (since they’re not involved in natural resources they don’t qualify). If MSFT had to raise capital every time they make an acquisition they’d probably find their investments in Skype or Nokia rather less well supported by the investors in the secondary equity offerings whose sponsorship they would need.

Saturday’s New York Times ran a thoughtful piece that should send a shudder through any holder of long term bonds. While maintaining low inflation is typically in the DNA of every good central banker, some are starting to question the orthodoxy of a relatively inflexible approach to changes in the price level. While high inflation (10%+) is widely (and no doubt correctly) believed to be highly damaging, there is support for the notion that inflation above 2% (the Fed’s target) can ease price adjustments. This is because while few workers will willingly accept a cut in pay, 5% inflation with a 1% pay hike results in the same 4% loss in REAL earnings as a 2% cut with 2% inflation. In other words, a little bit of inflation allows companies to increase profit margins as long as their revenues keep better pace with inflation than their costs.

Presumptive Fed Chairman Janet Yellen has argued for the benefits of temporarily higher inflation, and many academics including some quoted in the NYTimes article have argued the same. It’s a logical extension of the strategy of financial repression currently being pursued. Interest rates that are equal to or below inflation are a fairly painless way to reduce the inflation-adjusted value of debt, and in the U.S. we have $36 trillion of debt if you add all levels of government, households and students as I showed in my book, Bonds are Not Forever; The Crisis Facing Fixed Income Investors.

It illustrates the shifting winds; because debt is so ubiquitous, minimizing its cost to borrowers is more important than appropriately compensating those who fund it. So far it’s sound public policy. But clearly holders of long term bonds yielding close to current inflation rates are scarcely being compensated for the risk that a drift up to 3-4% inflation may turn out to be a quite acceptable monetary policy outcome.

The equity market has had a great run, currently up around 24% for the year (S&P500). Tempting as it is to assess the risk of a reversal as high, we tend to avoid market calls like that. But two stocks that recently reported earnings provide an interesting contrast.

Netflix (NFLX) last night reported quarterly revenues of $1.1 Billion (up 22% year-on-year) and EPS of 52 cents (versus 13 cents a year ago). At $360 a share it’s currently trading at 106X next year’s forecast EPS of $3.41, or 4X next year’s forecast revenues. CEO Reed Hastings was moved to comment on the “euphoria” surrounding the stock. We don’t own NFLX, sadly, since it has rallied around 275% so far this year. It obviously was very cheap a year ago, but doesn’t fit our investing model of companies with reasonable earnings visibility and a persistent competitive edge. They have a great product though.

IBM reported last week and disappointed analysts with revenues of $23.7 Billion, about $1 Billion less than expected. IBM will probably earn around $16 in EPS this year, close to $18 next year and remains on target for management’s goal of $20 in operating earnings in 2015. It currently trades for less than 10X 2014 EPS. IBM is down about 10% this year, around half of which came as a result of their disappointing 3Q13 earnings last week. IBM’s revenues have been flat for years. In 2008 they generated $103 Billion in sales. They’ll probably do $101 Billion this year and somewhere between 100 and 104 in 2014. IBM is not a company with revenue growth. However, their EPS in 2008 was $8.93 and their operating margin has improved from 15.2% to around 20%. Over six years they’ve doubled profits on flat sales by operating more efficiently and providing customers what they want. They’ve also reduced their sharecount by 18% through buybacks, further supporting the growth in EPS. They will keep doing all of these things.

We own IBM. The contrasting stock performance of IBM and NFLX don’t mean the market is expensive, but at current valuations we would only ever own the former and not the latter.