Art dealers are increasingly distressed as the auction houses are stealing their customers, enticing them with quick profits from flipping recently acquired paintings and works of art at auctions.
If this sounds familiar, just rewind the last couple of years and relive some of those moments on HGTV where Ma and Pa made quick millions renovating dumpy old houses in ghettos and flipping them onto another set of Ma and Pa who financed the purchase with a subprime mortgage, in expectations of flipping the house onto someone else in the next few months.
To be sure, the art world does have some money to throw around. Yet, irrational exuberance is, well, irrational exuberance.
According to the Wall Street Journal " As prices for contemporary art have skyrocketed, new works have started to appreciate so quickly that they can be flipped at auction for large sums only a few years or months after they're first sold at galleries." More interesting is the notion that auction houses are acting in a "heretical" fashion by arranging sales between individual collectors.
Indeed, this time seems to be different as Amy Cappellazzo, international co-head of Christie's postwar and contemporary department, told the Journal, the art world seems to be "moving faster" these days, and the market "doesn't consider feelings of artists or dealers in the process," [of creating a sale.]
In essence, art dealers and auction houses are at war with each other, with the former accusing the latter of invading their territory, which traditionally was of acting as the "gatekeeper" of the art world, while auction houses sold off estates and moved "older works."
But what is really happening, as one artist puts it is that his paintings in some cases are "traded constantly like commodities."
Indeed, the art world, like the rest of the world, is being steered by the laws of supply and demand, and being fueled by fast money who has been lured away from the last bubble, housing.
What makes the situation most acute is the fact that auction houses, in order to attract business, are allegedly paying customers over 100% of what they get from the sale of paintings, making us wonder how some of these companies are making money.
Chart Courtesy of StockCharts.com
Yet, at Sotheby's (NYSE: BID, above), business, which was booming as of the most recent quarter, with profits on the rise along with revenues, and a rising chart suggesting that Wall Street is betting on more good news in the future, something may not be totally right after all.
According to Bloomberg, "Sotheby's has guaranteed 78 percent of the value of a contemporary art sale next month, increasing the risk of losses in a market weakened by financial market turbulence."
Indeed "Sotheby's promised sellers minimum prices for art valued at $174 million to $220 million, based on data in the catalog for the Nov. 14 sale, Kristine Koerber of JMP Securities said in a report last Friday. The guarantees include works by Francis Bacon, Mark Rothko and Andy Warhol. A year ago, Sotheby's guaranteed 35 percent of the value of its contemporary art sale, Koerber said."
Conclusion
The art world beats to its own drum and sports its own set of rules, but the fuel for its success is the same as for any market, money. And money of such large magnitude only comes from the very rich, such as hedge fund managers and private equity moguls.
The key to what's happening is two fold. First, the auction houses are trying to squeeze the art dealers. Second, in order to do so they are guaranteeing the art collectors double what they were guaranteeing just a year ago, putting the company at high risk should there not be a high enough set of bids for the works to be sold.
But why are the auction houses suddenly trying to cut the art dealers' throats? Is it because their business is so soft that they have to resort to such measures? Or is it just greed? Either way, it's a set of developments worth watching.
And therein lies what we, as investors should be looking for. Does Sotheby's know something that the rest of us don't? Are they sticking their neck way out in order to corner the market? Or are they just desperate for business in a dying market?
If there are no bids for the art, Sotheby's will take a bath, and it could well be a sign that the economy is starting to turn down faster than anyone else thinks, since even the very rich and famous are having to tighten their belts.
Interestingly, Christie's told Bloomberg that it was depending on "Russian and Asian buyers to increase sales." Maybe this time it is different.  | Oil And Commodity Summary: |
