Saturday, April 01, 2006

The Art Market on Wall Street

One of the major auction houses, Sothebys, is a publicly traded company. Its stock is listed on the NYSE with the ticker symbol BID. Without going into a lengthy discussion of what makes stock prices go up and down, I will just suggest it is the perceived prospect for future earnings and investor enthusiasm. If this is the case, I thought the stock of Sothebys Holdings might be an interesting proxy for the art market.

If Sothebys earnings are good or improving we could infer that the art market is strong as well. Is this the case? Here is a chart from for Sothebys, NYSE:BID

I have marked in with red and green my observation that there is a potential symmetry in the price movement. Curiously, on the right side of the chart, it suggests a potential peak in Sothebys stock in mid 2007. If auction results continue to be strong, we could expect Sothebys earnings to increase from the current $1.00 per share (this is the trailing 12 months number) and for the stock price to follow.

The prospect for future earnings is one part of the equation, the second is investor enthusiasm. What causes investor enthusiasm? Investor enthusiasm is the result of seeing the obvious, good earnings and a strong interest in the art market. Unfortunately this often cumulates right near the peak in the stock price, all the good news is factored into the stock price and the uninitiated are projecting similar increases into the future. Sometimes this is the case, more often not, the stock price peaks and begins its decline right when earnings and news look good.

For most, it is difficult to correctly analyze the companies prospects, so is there another way to look at the situation for warning signs that things may not be as good as they look?

Yes. In the Sothebys chart, the periods 1989 and 1999 saw a sharp upward spike in the Sothebys stock price. These sharp spikes are an indicator that investors are enthusiastic, have finally recognized how strong Sothebys markets are and they bid up the stock price. Unfortunately, the art market is cyclical and these spikes will tend to also occur near peak periods in the art market. On the other hand, if the stock price rises in a more orderly fashion, without the three month price spike, it would indicate the strength in the art market might be growing but at a more moderated and therefore sustainable rate. Unfortunately I do not think this is the case.

Looking at the current chart, it appears that Sothebys has started an accelerated move higher. The bars on this chart are monthly, so this can continue for awhile with the stock price moving into the $40 or $50 range. This is not a done deal but if a spike to $40, $50 or $60 does occur, it will probably be a very good sign that a decline in the art market is just around the corner.

Although there is not much historical data available, the price action of Sothebys may also be a good indicator of the overall art market. I will continue to keep an eye on this and update my observations as we go along.

Legal disclaimer: This comment should not be construed as investment advice, consult your financial advisor.

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