Mayweather Vs. Pacquiao, The Kentucky Derby, And Sotheby's Sell Signal

May 04, 2015 9:52 AM ETSotheby's (BID)CHDN, MGM, SPY8 Comments

Summary

  • An overview of my own priceless experiences and views on money.
  • Ticket prices paid for premium events, including the Mayweather vs. Pacquiao match and the Kentucky Derby, suggest incipient inflationary pressures.
  • The stock prices of MGM Resorts and Churchill Downs show that speculative money has returned to gaming stocks.
  • Declines in Sotheby's stock price have historically been a reliable indicator of broader market weakness.
  • Sotheby's stock price is forecasting broader market weakness, and it is a short candidate.

Introduction

"Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad."

- Jens O. Parsson (Ronald H. Marcks)

As I have gotten older and think back upon the fond memories that I have had, and the blessings I have had in my life, especially with loved ones lost, I have increasingly come to believe that life experiences are priceless and irreplaceable for any amount of money, but I am also frugal, and this paradox has surfaced throughout my life. I will get to this paradox when examining the prices of tickets and artwork today, further down in the article, but for now, I am going to take a moment to look into the past to reminisce.

Over the course of my career and my life, I have been blessed to be "poor", "wealthy", and everywhere in between, sometimes one after the other, and I suppose that is the life cycle of an entrepreneurial person. Through my experiences, I have learned that there are life lessons to be learned in each circumstance. During the course of the successes and failures, I have always had a consistent work ethic. This was the product of my father's, who insisted I start working and providing for myself at a young age, and he prevaricated to get me a paper route with the Post Tribune in Crown Point, Indiana at 9 years of age. Some of my fondest memories are those mornings with him, and I hope that I am able recreate this experience with my three children, though it seems like only adults deliver the papers these days. My dad taught me to fold papers, and through these hour-long morning sessions with him, he also taught me to keep an optimistic attitude no matter what happened.

My father was a repairman for U.S. Steel, who got laid off and started a heating and cooling maintenance business, where he turned out to be a terrible businessman. He and his business partner, Norman, could not bring themselves to charge enough for projects like fixing an air conditioner, so they charged what they thought was reasonable, which turned out to be about the cost of their lunch for that particular day. My mother and Norman's wife would not put up with this for too long, and thus, they closed this business after two years, leaving my father with only a giant Ford van for his efforts - which he then converted into our family vehicle, where he hauled my two brothers and myself around. After this stint as a business owner, my father became a teacher, which was his true calling, and he impacted more lives than I could ever imagine doing. He was a hero of mine. And I miss him.

When I first started working in the investment world, I used to travel to conferences on a regular basis, and I always liked bringing traveling partners along - as I still do to this day. Some day, I hope to get my three kids to travel with me, or me with them. My dad was my favorite person to travel with, as he knew how to make each person feel like they were the most special person in the world during the time he spent with them. My father continued to teach me life lessons even on these trips. He always knew how to stretch a dollar, even when we did not have to stretch one anymore, and I can still see him now, checking into an expensive hotel room with me and going to the grocery store down the road to buy orange juice, milk, tea, ice, and food. He would come back to the hotel, close the drain on the hotel sink, pour the ice into the sink and put the drinks in there, along with any food that needed to be refrigerated, setting up the room for our stay together. He taught me to value a dollar, though he also taught me to invest and speculate and be involved in the markets, and that is a different story for another time. Even though I knew the value of a dollar, and still do to this day, I have to be honest - the fact is that I have lost this lesson at times, as I have forgotten Mr. Buffett's Rule No.1 and Rule No.2 in pursuit of outsized returns at various junctures in my life.

Besides recalling fond memories of my dad, the point of my story is that even when I have been blessed to accumulate large amounts of wealth relative to my upbringing, I have always been relatively frugal, and that was ingrained in me by my dad. As a result, I turned into an aggressive/conservative investor in the mold of Marty Whitman or Mr. Buffet himself, who both made their fortunes with large, concentrated bets, even though they were frugal in their everyday activities. However, occasionally I have lost course, and drunk by my success, I have been more aggressive than warranted, forgetting about the downside - and these have been dear lessons to pay for.

One example of my conservative, or quirky nature has been in my car choices. I have been driving a 2003 Blue Jeep Wrangler from when I bought it new through today. In fact at 37 years of age, I have principally driven only two cars (we have had a family car that was shared for our children) in my life - both bought new with my savings - and I started driving to school and work (washing dishes and cooking at a restaurant, stocking shelves at a hospital) as soon as I was able to drive, which was at 16 years of age. At that time, I had accumulated savings from my paper route and other jobs, and my dad went with me to buy a GMC Sonoma pick-up truck, which was blue, just like my jeep. Now, I am not saying this to brag, though I am proud of the achievement for some strange reason. Like anything else, though, being proud of something can be your downfall, and not spending money for priceless experiences could be a consequence of my frugalness that I may regret later in life.

When I first started making a larger income, I actively tried to hide this from people, including my friends and family, and I hid some of my generosities with my newfound wealth, as I wanted to remain quiet and anonymous. Through experience, I have found that this is not a good way to live, at least for me. In fact, the life experiences that I am going through currently have given me a different vantage point on wealth and how it should be used. To conclude, I am still searching for that balance between frugalness, and having your wealth have its most meaningful impact. One thing I can say for certain is that you must have as many memorable experiences with the ones you love as you can. And that does not necessarily mean spending money on them - the most difficult times in life can also be the most rewarding moments, as challenges stimulate personal growth and cause people to bond over shared experiences. I remember reading a story about how life expectancy increased during the Great Depression, as people bonded together, and that makes me think about all the special people I have been blessed to have in my life now. To close, remember to make people around you feel like the most special person in the world when they are with you. That is a lesson I learned from my dad!

Inflation = Too Much Money Chasing Too Few Goods

As I was reading this morning, I came across an article about the Kentucky Derby, titled "$10,000 Derby Seats Net Churchill Downs $83 Million In 2 Minutes". 2 minutes? That is amazing! The price per seat is staggering on its own, but the amount of demand to cause $10,000 seats to sell out in two minutes must be extraordinary. I have never been to the derby, despite living close enough to drive to it in a few hours, and it sounds like a terrific experience and event. It encompasses a lot of my favorite pastime activities, including being outside, figuring out the odds, and wearing hats. While the experience of the Kentucky Derby may be priceless, the price tag for the best seats - which is equivalent to that of a small, reliable car - got me thinking that headlines and news stories like these could mean we are in the final stages of the current bull market, where speculative excesses emerge and emerging inflationary pressures rear their ugly head. Just as I was pondering whether I could, or would, ever pay $10,000 to go the derby, I came across another article with the headline "You Aren't The Only One Who Can't Get Mayweather-Pacquiao Ticket". In the article, it is speculated that floor seats are going for $100,000, famous celebrities and politicians cannot get tickets at any price, and that the average resale price of a ticket for one seat in a 16,800-seat arena was $6,268, per Stubhub. On the surface, this seemed like another sign of speculative excess and forthcoming inflationary pressures, and it caused me to look up the stock prices of Churchill Downs Inc. (CHDN) and MGM Resorts International (MGM), the two respective hosts of this Saturday's sporting events, for a historical perspective; I have posted long-term performance charts listed below.

There Is Definitely Speculation In Gaming Stocks

Looking at the above charts, Churchill Downs has had a remarkable run, far outpacing the S&P 500 Index (SPY), with the relative performance accelerating in 2012, and going on a parabolic rise ever since its lift-off at the end of 2011. Additionally, as a horse track owner and casino owner, it captures two categories where hot money flows - cementing its status as a leading indicator of emerging inflationary pressures. Building on this, MGM Resort's stock price has perked up since 2013, and it has outpaced the SPY by a healthy margin over this time frame, after it crashed in 2008 - so consumer overindulgences are returning as people feel more confident spending money.

Sotheby's Has Been A Leading Indicator

I have been reading Marc Faber's GloomBoomDoom Report for the better part of fifteen years, and his writing style has inspired me as a writer. From time to time in his reports, Faber will look at the world of artwork, antiquities, and rare coins to gain perspective on how the ultra-rich are spending their money. As a result, I have been following Sotheby's Holdings (NYSE:BID) for a long time, as they remain the premier auctioneer of fine art, decorative art, and jewelry all over the world. Prices for top-tier works of art remain at all-time highs, yet the stock price of Sotheby's, which has a history of leading market downturns, as indicated in the chart below, has not yet been able to break out to new highs - and in fact, has been weakening since 2014, offering a warning sign to the broader stock market:

Looking at the chart of BID above, the green circles notate when it has topped and the red circles notate when the broad stock market has topped. Thus, BID has been a reliable leading indicator, declining ahead of the SPY in 1999, 2007, 2011, and potentially in 2014. Thus, unless BID makes a new high in 2015, there is an existing divergence between BID and SPY that will not be resolved until the stock market, as measured by the SPY, declines, or BID eclipses its 2014 high.

A Potential Short Opportunity

Since the share price of Sotheby's has historically been a reliable leading indicator of broader stock market weakness, conservative investors should heed the warning sign that BID's current stock price is advertising, raising the level of cash in their portfolios. Building on this point, expected returns for U.S. equities are near all-time lows, so raising cash and becoming more defensive should be strategies that all investors are considering at the current juncture. Investors and/or traders who are more opportunistic in nature could look to enter a short trade in Sotheby's itself near today's price levels. BID is an attractive short candidate due to its higher-than-market beta (1.7), its higher-than-market price-to-earnings ratio (25 for the trailing twelve months), its declining earnings expectations, a tendency to move sharply down ahead of the market, and due to the weak relative performance of its stock price since 2014. An investor/trader could sell short today at approximately $43, with an initial downside target of $35, which is an area of chart support and also approximates BID's 2014 low, for a potential gain of approximately 18%. If BID moves above its 2015 high, which is approximately $45, and closes above it for 3 consecutive trading days, I would close the short position. Thus, there is approximately $2 of risk, versus approximately $8 of profit at our initial target price, for a favorable risk/reward trade over the short to intermediate term. Once the target price is reached, the trade should be re-evaluated as a breakdown in BID, below its 2014 low, and/or the breakdown of the broader stock market could prompt a lower target price.

Put Options Offer A More Favorable Opportunity

I often choose to create short positions with put options, due to their defined risk and magnified reward, and with a sector as volatile as Sotheby's, I would advocate the same strategy here for investors who have an aptitude for options. This is something I have specialized in for the past 15 years.

Conclusion - A Warning Signal And A Favorable, Defined Risk/Reward

A lot of money was being thrown around in the run-up to the Mayweather/Pacquiao fight and the Kentucky Derby, which both occurred on Saturday, May 2nd, 2015. Additionally, top-tier artwork is selling for record high prices. These are all signs of emerging inflationary pressures that could potentially cause interest rates to rise and stock prices to decline. The current eagerness of consumers to overspend is eerily reminiscent of excesses that have marked the top of bull markets in the past. Sotheby's has been a reliable market-leading indicator for over twenty years, and it remains substantially below its 2014 highs, sending a warning signal to the broader stock markets. Conservative investors should consider raising cash, while more opportunistic investors can consider looking for shorting opportunities. BID itself is a viable short candidate, and it currently provides an attractive entry point for an aggressive investor to speculate on the short side of the market, with a defined risk/reward.

This article was written by

KCI Research Ltd. profile picture
26.98K Followers
Author of The Contrarian
"Against the grain" investing backed by real-world wisdom and experience
Founder of "The Contrarian", a premium research service, featuring a committed, collegial group that has uncovered a number of hidden gems, hidden in plain sight.  Immensely proud of what our members have accomplished.  Actively investing since 1995, I have soared like an eagle, and been unmercifully humbled by the markets. Achieved positive returns in 2008, and turned an account with $60,310 on 1/1/2009 into an account with $3,177,937 on 11/30/2009. My best years have been 1995-2003, 2008-2012, 2016, 2020, & 2021. My worst years were 2013-2015 & 2017-2019. I believe inflation is coming, and we are at an inflection point in the markets.


Twenty plus year career as an investment analyst, investor, portfolio manager, consultant, and writer. Founder of Koldus Contrarian Investments, Ltd, which was incorporated in the spring of 2009. Dyed in the wool contrarian investor, who has learned, the hard way, that a good contrarian is only contrarian 20% of the time, but being right at key inflection points is the key to meaningful wealth creation in the markets. I believe we are near a meaningful inflection point, perhaps the biggest one yet, for the third time in the past 15 years.


Historically, I have had huge wins and impressive losses based on a concentrated, contrarian strategy. Trying to keep the good while filtering out the bad.

Seeking to run an all weather portfolio with minimal volatility and index overlays to capture my strategic and tactical recommendations along with a concentrated best ideas portfolio, which is my bread and butter, but the volatility only makes it suitable for a small piece of an investor's overall portfolio. The following are a couple of my favorite investment quotes.


"Life and investing are long ballgames." Julian Robertson

"A diamond is a chunk of coal that is made good under pressure."

Henry Kissinger

"Knowledge is limited. Imagination encircles the world." Albert Einstein

I’ve been on top of the world, and the world has been on top of me. I have learned to enjoy the perspective from each view, and use opportunities to persistently acquire knowledge, and enjoy the company of those around me, especially loved ones, family, and friends.

At heart, I am a market historian with an unrivaled passion for the capital markets. I have had a long history and specialization with concentrated positions and options trading. Made money in 2008 with a net long portfolio, deploying capital in some of the market's darkest hours into long positions including purchases of American Express, Atlas Energy, Crosstex, First Industrial Real Estate, General Growth Properties, Genworth, Macquarie Infrastructure, Ruth Chris Steakhouse, and Vornado near their lows. Shorting, hedging, and option strategies also helped me in 2007 and 2009, and these are skills that I have developed ever since I started trading heavily in 1996.I enjoy reading, accumulating knowledge, and putting this knowledge to work in the active capital markets, learning lessons along the way.To this day, I continue to learn, and some of these learning lessons have been excruciatingly difficult ones, especially over the past several years, as I made mistakes allocating capital, including a sizable portion of my own capital (I always invest alongside my clients), to commodity related stocks. While all commodity related stocks have struggled since April of 2011, coal companies, which attracted me due to their extremely cheap valuations, and out-of-favor status (I am a strong believer in behavioral finance alongside fundamentals and technicals) have been the worst investing mistake of my career. The focus on the commodity arena has been the biggest mistake of my investment career thus far, yet in its aftermath, I see tremendous opportunity, even larger in scope than the fortuitous 2008/2009 environment.The capital that I accumulated and the confidence gained in navigating the treacherous investment waters of 2008 gave me the confidence to launch my own investment firm in the spring of 2009, right before the ultimate lows in the stock market. At the time I was working as a senior analyst at one of the largest RIA's in the country, and I felt strongly that the market environment was the best time since 1974/1975 to start an investment firm.

Prior to starting my firm, I was a senior analyst for three different firms over approximately 10 years (Charles Schwab, Redwood, Oxford), moving up in responsibility and scope at each stop along my journey. Since I was a paperboy, I have always had an interest in the investment markets. I love researching and finding opportunities. I was a Chartered Financial Analyst, CFA from 2006-2018. Additionally, I have been a Chartered Alternative Investment Analyst, CAIA. After starting in the teaching program at Ball State University, I switched to a career in finance when I turned a small student loan into a substantial amount of capital. I graduated summa cum laude with a degree in finance from Ball State.


Full disclosure, I am not currently a registered investment advisor, though I did serve in this capacity from 2009-2014, while owning Koldus Contrarian Investments, Ltd. Additionally, I held various securities licenses from 2000-2014 without a single formal complaint filed. At the end of 2014, I voluntarily let my state registration expire, as I transitioned the business to a different structure after going through a brutal business environment, divestiture and difficult divorce and custody battle. Prior to this, I had passed, and held, various securities exams and licenses, including the Series 7, Series 63, and Series 65 exams, in addition to others, alongside the CFA and CAIA designations. Unfortunately, I did not file the proper paperwork to withdraw my state registration, and I did not disclose a personal arrangement, and subsequent civil case, between myself and a former close personal friend and client. This arrangement was initiated informally in 2011, after a substantial period of success, as we aimed to be business partners, and it ultimately resulted in a dispute. I was unaware that I was required to disclose these items, and my securities attorney, at the time, did not advise me to do so. Previously, I had managed a portfolio for this gentleman, and we had taken an investment of approximately $7 million in 2009, and grown it to over $25 million at the beginning of 2012. After a very difficult year of performance, an employee of the firm I owned, and friend, resigned in early 2013, and took the aforementioned client to a competing firm. As a result of not filing the proper paperwork, I agreed to a settlement, with a potential $2500 fine in the future, depending on if I choose to reapply to be a non-exempt advisor. Additionally, while going through the difficult divorce and business dispute and divestiture, I did not file the proper disclosure on two of the annual CFA renewals. As a result, the CFA Institute sought a 3-Year Suspension of my right to use the CFA designation, which I appealed, since the primary investigator in the case sought a 1-year suspension of my right to use the CFA designation for a majority of the investigation. A Hearing Panel heard the case, and went against the recommendation of the CFA's Institute's Professional Conduct Department. Long story short, be careful who you trust, especially when substantial money is involved, and always disclose everything properly, which is hard to do when you are going through difficult situations, as this is the last thing you are probably thinking of at the time. In closing, I have had more experience in the markets, business, and life than most, yet I am grateful & thankful for every day. Additionally, I have learned through success and failures that you have to move forward, and if you can do this, your life will form a rich tapestry of stories.
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Disclosure: The author has no positions in any stocks mentioned, but may initiate a short position in BID, SPY over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Every investor's situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions.

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