The Auctioneer Stocks are Sensitive to Speculative Activity (BID volatility)

This morning was rather volatile for the stock price of Sotheby’s (BID). It spiked up to 51 in the morning and is now trading at around 47. See the chart below.

Sotheby's Stock (past 5 days)

 

This reminded me of the ‘flash crash’, when the Sotheby’s stock was all over the place. I’m not saying there might be a flash crash again. Instead, I thought this would be a great time to write about my theories on auction house stocks. It is my contention that they could be good leading indicators for the general stock market.

 

Auction houses are in the business of taming two beasts: 1) the flow of sellers putting things up at auction, and 2) the flow of buyers chasing these goods at auction. The auction houses want to sell as many goods as possible at the highest prices possible, with the greatest % commissions possible. In a way, this makes them slaves to their markets. That is, although they can attempt to position themselves carefully, they cannot escape the rudiments of their markets. Sotheby’s cannot help but be burned when the art market takes a dive.

 

But none of the above is really interesting, for it just says that auction houses are dependent on their markets. However, there is an interesting aspect of their businesses that makes them useful with respect to market timing.

 

The Auction House Revenue Cycle:

 

Auction houses negotiate their fee percentages with their clients. Else if they do not negotiate, it is certain that they change their fee percentages over time to suit market conditions. As these guys are typically not students of market psychology and – in particular – money, their negotiations tend to follow the structure of the market. When sellers are abundant, they are able to pick and choose and negotiate high fee percentages. Whereas when sellers are scarce, they need to offer lower fees in order to draw out sellers. Incidentally, if they could anticipate monetary trends, they might not be so swayed by these factors.

 

This puts auction houses in precisely the wrong positions at market tops, and the very best positions at market bottoms. Precisely when markets are at their peaks, they have negotiated low fee percentages (sellers are scarce at market tops). So when prices collapse, they get small fees from surprisingly low prices. Precisely when markets are at their bottoms, they have negotiated high fee percentages (sellers are abundant at market bottoms). So when prices pick up, they get high fees from surprisingly high prices. This is why I like to look at auction houses (e.g. Sotheby’s, Ritchie Bros. etc) when market sentiment is one-sided.

 

Corroborating evidence is found in the fact that the Sotheby’s stock hit it’s low on 26th Feb 2009, whereas the market bottomed on 6th March 2009. Ritchie Bros. (the agricultural and construction machinery auctioneer) bottomed on 2nd March 2009.

 

If there were an A/D line for the art market, would it be declining?

 

Occasionally, I watch and make notes on art auctions that take place at Sotheby’s (link in sidebar). A recent trend that I have noted is that the participation in the art market bull run is waning. I notice that more famous works are going strong, yet smaller works are lagging. This is confirmed in the opening comments in a recent edition of the “Sotheby’s At Auction” magazine. The CEO of Sotheby’s noted that – during the autumn of 2010 – “perhaps the most remarkable thing about the recovery is how widespread it has been.” He then goes on to say that – recently – “lesser works did less well”. (NOTE: he does not share my view; rather he attributes this to a “discerning, intelligent market”).

 

If there were such a thing, would the A/D line for the art market be declining?
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Posted Mar 1, 2011
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