Sotheby's (Falling) Stock as a Market Indicator

Sotheby's (BID) is an auction house for expensive artwork, jewelry, antiques and collectibles. It could be used as a gauge to measure hot money and liquidity flowing around the world. The argument: when super rich people have too much money to burn, they will bid up the prices of expensive art sales by setting one record after another.

The expense side of Sotheby's income statement is very stable and predictable - it's mainly salaries, travel and some operating expenses. But its revenue side is very volatile. Good years can see profit double (from 2005 to 2006), while bad years see earnings plummet alongside its stock price. Such 'operating leverage' is the nature of auction business - not too different from banking and trading of investment banks.

Historically, the stock price of Sotheby's has successfully funcitoned twice as a leading indicator of global markets. The first time was 1989, when you saw a huge spike in its stock price from single digits to around $30. At that time, the Japanese had just enjoyed a long period of both stock market and real estate boom, and had a great deal of money to burn. As we all remember, they were buying every expensive item in the world, especially in the US, and not surprisingly bid up art sales to a sky-high price. But after this first peak of Sotheby's stock price in 1989, the following year both the Japanese stock market and real estate tanked and have yet to fully recover.

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The second peak of Sotheby's stock price happened in 1999 around $40. This time it was the US, especially the NASDAQ and internet boom. With so many people holding a great deal of cash from the booming "new" economy, it was a great business year for Sotheby's. We know what happened the year after, when the bubble burst.

Fast forward to today. Sotheby's reached $61 in October this year, then in November it gapped down to as low as $30 and now trades in mid-30s. Was 2007 this the third peak? We probably won't know until many years from now. But the recent drop is so damaging from a technical chart perspective, it can be argued that this is likely the case.

If so, who is to blame this time? It is not the Japanese, since they have been more on the sales side. Is it US? Partially. But it is probably more emerging markets such as wealthy Asians, Middle Easters, Mexicans and Russians who have been very active in the auction market these days.

If this is the third peak and BID is truly a leading indicator, who will be its casualty this time? The US equity market? Emerging markets? Only time will tell.

Comments

[User 127716:]

Would be nice to use BID as a leading market indicator, but this recent dip was because Sotheby's made risky financial deals and got burned in their Imp/Mod sale. The art market seems fine for now (though few would say these flush times can go on forever), but Sotheby's screwed up, and the share price took the brunt of it - though because people who don't work in the art market glean too much from sale results, it's all sell, sell, sell - the sky is falling. (The sale was disasterous, but they had a great one the next week, but from this can clearly see that the stock price was held aloft by extremely unrealistic assumptions "Perfect sales always and forever!!")

S's, being the only publicly traded art business, is taken as a proxy for the whole art market (which is susceptible to wide emotional swings as to concerns about its "health"). This makes for a volatile stock.

Let me tell you about the very rich. They are different from you and me. You need a LOT of money to buy a $20M picture (i.e. a couple hundred...), and chances are the noise that is financial news won't affect the resources of those who command that sort of wealth. The picture might go for only $15M, but the funds are still there.

2007 Dec 04 08:21 PM

[thomast2:]

Very insightful at this very specific and special auction market behavior. Thank you very much for your reply. I am using BID as only one of the many indicators and this one is kind of reinforcing the others which are all pointing bearish, at least for now.

2007 Dec 05 09:30 AM

[thomast2:]

Very insightful views on this specific and special auction market behavior. Thank you very much for your reply. I am using BID as only one of the many indicators and this one is kind of reinforcing the others which are all pointing bearish, at least for now. Thanks again.

2007 Dec 05 10:06 AM

[User 127716:]

Thanks for the reply - maybe I was a bit harsh. While I'm certainly not bullish on the art market, and some (Eli Broad) say the peak was months ago - I do think that the recent stock activity wasn't necessarily reflective of "fair market value". Perhaps overvalued before, and undervalued now (and volatility is often a sign of regime change), and do think that the recent dip was unduly influenced by unreasonable psychological factors, not true valuation. I do certainly agree, though - a year, two years from now, will be wondering how BID/the art market had so much growth.

2007 Dec 10 10:02 PM

[Daniel Hassett:]

A few very important points to consider about the high-end art market in the states:
1. Dollar is cheap and US art is cheap for foreign buyers.
2. The super rich are getting richer. Many of the super rich work in the financial markets and maybe they will have a softer year next year, but that's only part of it. There are for more international multi millionaires today than there were 5 years ago and they are the one's that are very active in the market.
3. Art is a great medium to queitly transfer and launder money
4. Sotheby's has increased its commission fees from 20% to 25%

2007 Dec 20 06:27 PM

[Daniel Hassett:]

A few very important points to consider about the high-end art market in the states:
1. Dollar is cheap and US art is cheap for foreign buyers.
2. The super rich are getting richer. Many of the super rich work in the financial markets and maybe they will have a softer year next year, but that's only part of it. There are for more international multi millionaires today than there were 5 years ago and they are the one's that are very active in the market.
3. Art is a great medium to queitly transfer and launder money
4. Sotheby's has increased its commission fees from 20% to 25%

2007 Dec 20 06:27 PM