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  Forget the art of the deal - we're after deals in art

BENJ GALLANDER and BEN STADELMANN

Friday, May 22, 2009

The market meltdown did more than just cost people money; it led many to reconsider their investing methodology. We certainly did, but besides a few tweaks to the Contra system, it appears to work mighty well.

However, the downturn made it exceptionally clear how quickly money can disappear with nothing to show for it. So we decided to make certain that some of our funds were enjoyed on a daily basis via the acquisition of art.

No, we're not talking Group of Seven stuff here, or other illustrious painters for that matter. Instead, our view is turned toward lesser-known and aspiring artists whose work has the remote possibility of major appreciation, but in all likelihood won't do much better than the rate of inflation.

The great auction houses are not interested in this market. They need higher-valued renderings from which to take their commissions. Speaking of which, with the recession eroding even the assets of the rich, the marketplace for expensive wares is fading. And with it, the bottom lines of these corporations.

One outfit at the forefront of this world is Sothebys. This month's auction brought in $5 million less than the pre-estimate low of $52 million, prompting Tobias Meyer, a bigwig at the firm, to wax happily by saying, "The contemporary art market is alive and well." He neglected to mention that the haul was less than half as much as last fall's wheeling and dealing yielded. Such an optimist!

The recent quarterly results were ugly, with a loss of $34.5 million, much worse than a year ago, when the red ink smudged in at $12.4 million. Revenue at auctions dropped 71 percent. Debt, which has doubled over the past couple of years from the $250 million range to $500 million or so, is also affecting results.

The company is acting to stanch the bleeding. The annual dividend has been slashed from 60 cents to 20. Fifteen percent of the staff were eliminated last year, with another 5 percent facing the axe. Heck, even executive pay is being pared by 10 percent. Overall, the annual savings are expected to amount to about $160 million.

Under normal circumstances, the enterprise would be fantastically profitable with this lower cost structure, and after the write-downs are dealt with, there is the possibility of black ink in the not-too-distant future — assuming, of course, that people haven't completely gone off the idea of paying mega-bucks to hang pictures on their walls.

Pushing up prices in this industry will not be as simple as it has been in the past. Around the millennium, it was discovered that the two major players in the industry, Sothebys and privately owned Christie's International, had been fixing prices.

While it might be hard for some to believe that the purveyors of beauty in the "genteel" world of high-end art would stoop to the level of pickpockets, apparently this was the case. And naturally, in a fixed oligopoly, it is far simpler to make money than in the rough-and-tumble of an open, competitive market.

Nevertheless, it is always easier to survive in a sector where there is little competition. And even though the two giants appear to be on the up and up these days, there should be lots of room for profits in better times.

Sothebys stock could quadruple from the current level of around $10.50. That would still leave it far below the $60+ it touched in October 2007. Given the problematic debt load and the serious possibility of short-term losses, we are certainly not in any rush to buy.

In the meantime, the art scene will be perused for bargains. While this may not provide a financial return, it will add pleasure to the brain and splendour to barren walls. As Benj highlighted in his book The Uncommon Investor III, it is not all about money.


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