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Graham Arader
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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. 0 comments
    Feb 4, 2014 1:18 AM | about stocks: BID

    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

    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

    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
    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.

    Stocks: BID
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