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see bio of Graham Arader on Wikipedia We are the largest dealers in the world for Audubon's aquatints of Birds and Lithographs of Mammals, Rare Books, Historically important maps and fine atlases, Natural History watercolors, color plate books, fine globes and Americana.
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  • New Risks For Sothebys (BID) As A Result Of Their Large Payout To Shareholders.

    With their special dividend announced last week Sothebys reduced their
    chance to transform from a service provider hemmed in by fixed
    commissions and high overhead into becoming a vast storehouse of
    capital comprised of art, real estate and cash.

    To use the example of a bank - Sothebys now is more like a commercial
    bank that provides loans and has reduced their chances to become more
    like an investment bank with significant ownership of the companies
    that they advise and service.

    They have reduced their chances to participate in the returns
    available holding art over the long term by giving up their strong
    cash position.

    Basically Sothebys (NYSE:BID) is a company that sells art to the very rich
    (200 people make up 80% of their gross sales) taking a commission for
    their sales. This reason that the very rich trust them is because
    their commissions are transparent and they are perceived to be the low
    cost producer.

    On top of this the very rich expect their suppliers of art to make
    grand gestures, have numerous offices in magnificent venues, take out
    expensive advertisements, produce coffee table quality catalogs,
    donate their employee's time to charity auctions, support in depth
    research and provide sumptuous dinner parties to their clients on a
    regular basis. This scorched earth policy of low margins and high
    expenses has put many of their competition out of business but at
    punishing cost and great risk.

    To a significant extent they have succeeded but the model of slim mark
    ups and overwhelming overhead is difficult, maybe impossible for
    sustained growth and success. They are just as much a service
    organization supporting scholarship as a profit making corporation. It
    is a daily dilemma that challenges management with days spent doing
    research and nights entertaining their needy clients.

    And now a virus has come into their system that will be close to
    impossible to cure. This is the action of contemporary art promoters
    using auction houses to bid up the art they own in large quantities to
    create the impression of value. This market will crash when the
    collectors realize that they have been manipulated. It will come out
    that the supply is limited only by what collectors are willing to buy
    and that few sophisticated museum directors and their curators will
    have anything to do with it. Fifty years from now the only thing of
    value from this scam will be the promotional literature used to create
    it.

    The promoters have brilliantly figured out that new, unsophisticated
    art collectors coming into the art market primarily rely on auction
    records to make decisions on value. So they simply bid against each
    other at auction to create the illusion of value for their mass
    produced works of art. Sothebys benefits taking the commission for
    one work of art that is bid up but the promoters then see huge profits
    on the 100 examples of the same work of art that they have in their
    inventory. Foolish, testosterone laced, hedge fund cowboys looking
    solely at auction records are deservedly then hoisted by their own
    petard.

    Sothebys certainly does know know that outside manipulators are
    running up their own artwork at their auctions but they have become
    dependent on the commissions that these outsize sales generate. So
    dependent that they must be terribly reluctant to delve deeper into
    this practice. Their profitability would disappear and they would be
    reduced to going back to selling rare books and maps to cheap,
    covetous people like me.

    For Sothebys to survive much less succeed they have to have a large
    cushion of cash for the downturns and art market busts that regularly
    occur. A look at their chart confirms violent downswings in their
    stock price over the years. Large drops have occurred in 1999 to 2000
    going from $47 to $14.68 and again from 2008 to 2009 going from $61.40
    to $6.05, and finally in 2011 to 2012 going from $52.95 to $27.53.

    Bill Ruprecht and his team had done brilliantly preparing for the next
    crash by building up an appropriate cash cushion. This was lost last
    week when they appeared to give into the wishes of some share holders
    who firmly suggested that they free up their cash cushion.

    Also the cash that will be paid out will make it harder for Sothebys
    to take advantage of excellent opportunities like the Matisse Estate
    that they purchased in November 1990 for 143m where they subsequently
    made well over a 300% gross margin return on their investment.

    The simple fact is that an art dealer and auction house MUST be able
    to deal from a position of strength. The very rich have a well
    developed nose for fear and flee from those whose glands excrete even
    the smallest quantities. The Sothebys executive team have placed
    themselves back into the position of supplicants with this payout and
    the promise of payouts in the years to come. They have forced
    themselves back into the role of an under capitalized market maker at
    the mercy of their consignors and buyers who expect expensive service.

    This has happened just at the point when they could have achieved the
    vast profits that accrue to those who take long positions and wait for
    the 400% percent returns that can and do occur every ten years for the
    very best works of art. They will now continue to be a wonderful
    organization sustaining confidence in the art market but that provides
    the
    overwhelming amount of the profits to their clients. So they will
    continue to be loved by all (except Christies) but at punishing and
    dangerous expense.

    They are now vulnerable to a severe art market correction or one US
    Attorney who starts an investigation into the manipulation of
    American, German, English and Chinese Contemporary Art Market prices
    by outsiders that Sothebys may have failed to detect, police, report
    and reject.

    Disclosure: I am short BID.

    Additional disclosure: I have been buying art and historically important maps and books from Sothebys for over 40 years.

    Tags: BID
    Feb 04 1:18 AM | Link | Comment!
  • How Sothebys (BID) May Be Affected By Art Market Manipulation In China And The United States.

    During the 42 years that I have been an art dealer and collector, the
    one constant has been the integrity of Sothebys (NYSE:BID). While there
    may have been a price fixing scandal many years ago, I was not
    affected negatively by this. In fact as part of the settlement, I was
    paid over $300,000. So I personally benefited.

    Every time that there has been an issue between me and Sothebys no
    matter how seemingly insignificant, the management and experts working
    at Sothebys from Bill Ruprecht, the outstanding CEO, the heads of
    departments, especially David Redden, the scholars, the catalogers,
    everyone in accounting, even the people in shipping have acted with
    honesty and with a view of keeping my relationship with them intact.
    They have succeeded splendidly. I love Sothebys. Doing business at
    the very highest possible standards is a significant part of their
    DNA.

    The nature of the art business is that rich people expect to be
    treated with great care. No matter how outrageous the request, a
    smart team will find a way to give in and satisfy their client. Time
    and time again this has been the case for me and for other collectors
    that I have observed where Sothebys has been involved. One major
    reason is that only 200 people make up 80% of Sotheby's sales. So
    keeping all of those people on board with fair dealing and great
    service is key. It is a daily impossible task that they succeed
    at brilliantly. They are the masters at understanding their clients
    and building long term relationships based on always doing the right
    thing. From my view and experience their whole team should be
    commended and emulated. Their 200 top clients are a very valuable
    franchise because of this. I have spent over $90,000,000 with them in
    the last 4 decades and am proud to be part of that group.

    It is my opinion that no other auction house in the world does
    this as well as Sothebys. The skill, scholarship and integrity of the
    Sothebys team is deeply impressive to me and has been for over 40
    years in my business experience.

    One reason that Sothebys are considerably better than Christies is
    that Sothebys can liberally and cheerfully extend credit and give fair
    shipping rates. My experience with Christies is that this has not been
    the case for over 20 years. They have severely disappointed me again
    and again with their business practices. Recently an attempt was made
    to bid me up at an auction by a woman from Christies. She lied to me
    and told me someone else was bidding when there was not. When the lot
    did not sell because it did not reach the reserve, I was very unhappy.
    Nothing even close to this has ever happened at Sothebys.

    It is the integrity of Sothebys over the long term that will cause it
    to hold a dominant position in the art dealing world. They recognize
    how important this is and do everything they can to add even more
    luster to their reputation with each passing day. I cannot imagine
    how they could do a better job.

    Two increasingly worrisome events of the last decade pose great risk
    to Sothebys in the short term. While I am sure that their team will
    find a solution that will
    preserve their existence, they are going to take a serious hit as word
    gets out to the general art buying public, US Attorneys and their
    equivalent counterparts in China.

    The first danger is the overwhelming fundamental reason behind the
    high prices that are being paid for Chinese Art. The law in China now
    is that art can be traded for land owned by the Chinese government.
    What is happening now is that two or more collaborators will drive up
    a work of art to 100 to 200 times more than their cost. That art will
    now be traded to a museum at this vastly inflated value in return for
    land. Real estate promoters can now acquire land for a small
    percentage of what their competition pays without access to this
    method. As a result most real estate developers are flocking to this
    scheme even though they have little if any interest in collecting art.

    Using their auction scheme, it is now possible to get $50,000,000 of
    land for a cost in the range of $1,000,000 to $2,000,000 if one knows
    the right government officials. This is the primary reason that most
    of the so called buyers in China are in the Real Estate business. They
    call themselves patrons of the arts but they are just market
    manipulators bidding at auction against their partners for artwork
    they already own. The "established" auction results then create
    inflated trading credits for the land that these developers wish to
    acquire.

    This predominantly explains why Chinese art, especially Contemporary
    Art, sells for such inflated prices at auction in China.

    When the Chinese government decides to end this practice or decides to
    expose the perpetrators abusing this, the price of Chinese art will
    plummet. Collectors lured into this construct looking to unload their
    investments will find that they are lucky to get very much of their
    cost back. It is not a real collecting market at the current prices.
    It is a sham.

    In 2013 Chinese Art accounted for 12% of Sothebys sales for $675m in
    2013 and 11% of Sothebys sales in 2012 for $465m. This is a market
    that could well plummet for Sothebys in the short term should the
    Chinese government decide to end or limit this practice as it gets out
    of hand.

    The second danger is similar but with much larger numbers and risk -
    this is the practice of a few American contemporary art dealers
    bidding against their partners to drive up prices. They do this for
    two reasons - The first is to establish auction values for
    unsophisticated collectors to lure them into "special deal" purchases
    at or under auction prices. The second reason is to give their clients
    a profitable exit with the opportunity to make substantial tax savings
    by giving the art away after they have owned it for a year.

    My guess is that almost no one reading this article knows anyone who
    has spent over $1,000,000 buying contemporary art. I have over 200
    people who are members of the Forbes 400 on my mailing list who have
    been clients over the years and few if any of them collects
    contemporary art that I am aware of. And yet there are considerable
    numbers of contemporary paintings that sell for over $1,000,000. I
    have no idea who is buying them. And I have been in this business for
    42 years with major retail locations on Madison Avenue in the heart of
    the Upper East Side in New York City, in San Francisco, Houston and
    Philadelphia. There certainly may be real collectors out there but I
    find it very hard to believe when virtually ALL of my billionaire
    clients always relentlessly negotiate for months just to make a
    $10,000 purchase. The richer they are, the tougher they are. And I
    certainly know NO ONE from this entire group who has spent more than
    $100,000 for contemporary art much less $1,000,000 and certainly not
    $10,000,000.

    Of course I am jealous and only until recently have come to realize
    that these crazy prices are not due to the selling skills of the
    dealers or intrinsic values of the artwork. It is a market built on
    collusion and fraud driving prices up at public auctions in New York
    City and London. After this initial spark, the madness of crowds
    takes over and the frenzy feeds on itself. But sooner or later the
    realization that this is the case will end the bubble as it has
    happened before with Tulips in the 17th century, the South Sea Bubble
    in the 18th century, Orchids in the 19th century, Automotive Stocks in
    the 1930's, Airline Stocks in the 1950's, Enron Stock, internet stocks
    and real estate.

    Once this practice is discovered, tax deductions for so called "market
    value" will end and deductions will be limited to the buyer's cost.
    This will require an act of Congress to change the law but the abuses
    in the United States have been so vast, that the outrage of Congress
    will make this elimination of this deduction a very strong
    possibility. This will cause a severe downward pressure on prices.

    And, should the inner working of this market manipulation ever come to
    light they will prove to be irresistible for US Attorney's offices all
    over the United States. A partnership that knowingly bids up works of
    art to create tax deductions for its clients will be irresistible for
    this branch of the US Government. This will be especially true if
    certain members of these partnerships are existing targets that these
    very same US Attorneys have so far failed to put in jail.

    Right now Contemporary Art Sales represent 27% of Sothebys sales of
    $1.2B in 2013 and 29% in 2012 or $1.1B.

    A business model based on abuse of tax laws in the two largest markets
    in the world is highly risky. Tax laws can be easily changed by a vote
    of Congress especially since
    the elimination of tax deductions for fair market value will only harm
    the very rich and the museums that are their beneficiaries. The
    current administration clearly finds the support of both these groups
    a very low priority if a priority at all. And in China the land for
    art laws can change with the stroke of a pen.

    These two areas of the art market, Chinese Art and Contemporary Art,
    represent close to 40% of Sothebys current business model.

    Sothebys is faced with a massive challenge. My observation and firm
    belief is that they have not knowingly participated in anyway with
    this vast fraud in both the US and China even though their top
    Contemporary Expert and super salesman, Tobias Meyer, just quit. It is
    my firm belief that they will be found to be completely innocent of
    knowingly participating in these scams. However all the market
    manipulators that have been using Sothebys to boost prices to
    stratospheric levels will drag them into a nasty, prolonged, expensive
    legal morass. The unsophisticated buyers who bought in this mad run
    up will undoubtedly want to be made whole.

    Once this long battle ends, Sothebys will be again be good value when
    they go back to their core businesses of the last 250 years. There is
    no other auction house in the world that is even close to them in
    stature and integrity.

    Disclosure: I am short BID.

    Additional disclosure: Arader Galleries is the largest dealer in the world for Americana, Rare books, the work of John James Audubon, Natural History watercolors with locations in New York, Philadelphia, Houston and San Francisco.

    Tags: BID
    Jan 21 2:28 PM | Link | Comment!
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