Art Market Fall 2016

1. NEW YORK Over the weekend, the Wall Street Journal ran a story suggesting that auction houses would be offering generous incentives to consignors because of fears of a weak auction market.
The meat of the story was a list of fairly standard sweeteners—waived seller’s premium, photography fees and insurance—that collectors or advisors with attractive property or strong relationships can usually get in all markets, up or down.
The auctioneers who were happy to be quoted are aggressive regional houses that have to be very aggressive to compete with the global firms. For example:   “I use all the tools available to me to get important consignments,” says Peter Loughrey, president of Los Angeles Modern Auctions. “At $1 million, I offer crazy incentives.”
And: “When you know there is competition with other auction houses, the first place you cave is with commissions,” says Leslie Hindman, owner of Chicago-based Leslie Hindman Auctioneers.
Christie’s, Sotheby’s and Phillips—who spent the boom period of 2011-15 providing extremely generous incentives and guarantees—are far less likely to do that now than before.
It’s a paradox that these firms would be less likely to fight for market share in a down period. Yet as the pie shrinks, there are fewer places to compensate for the incentives with real revenue.
Sotheby’s has begun to apply more discipline across the specialist network if the last sales cycle is any indication. Recent personnel moves at Christie’s during the August hiatus suggest the once-profligate firm may be more disciplined this Autumn. Phillips has a raft of new specialists and business-getters coming aboard whose relationships are more likely to bring in quality consignments than incentives.
We’re entering a new market with new assumptions on both sides of the art selling equation. Don’t expect past behavior to indicate what comes in the future.
Art Auction Houses Want to Deal  (WSJ)
http://www.artmarketmonitor.com/2016/09/13/a-weak-art-market-doesnt-necessarily-mean-more-incentives-to-sellers/

2. INDONESIA Gulf News has brief feature on the growing traction in the Indonesian art market. Pointing out that Balinese art became popular in Europe during the 1930s turning the island into a magnet for artists. That tradition continues with Ashley Bickerton who has lived on the island for more than 20 years.
Indonesia, which is experiencing a resource-driven economic miracle, has more billionaires than Japan, according to Forbes. Add to that 17.6 million middle-class households with room for discretionary spending, according to Euromonitor International. This combined with the strong connection between collectors and their traditions are shaping the country’s art scene.
“Until recently, only Indonesians collectors collected Indonesian art. But due to globalisation, Indonesia is getting increasing interest from the international art market,” says Oei Hong Djien, owner of the OHD Museum in Yogyakarta with its impressive collection of contemporary Indonesian art.
http://www.artmarketmonitor.com/2016/09/01/indonesia-has-more-billionaires-than-japan-will-it-have-more-art-buyers-soon-too/

3. MALAYSIA Is the Art Market Big Enough to Launder Money? August 18, 2016 by Marion Maneker
Here’s an interesting take on international money laundering and the art market from the president of Transparency International in Malaysia. Unfortunately, it relies upon cobbling together “research” on money laundering and the art market that has appeared in a long string of flawed news reports.
Malaysia, of course, is ground zero for the 1MDB development fund scandal that is being investigated by several nations, including Singapore, Switzerland and the US. Compounding the issue has been the very visible reporting on Jho Low’s art purchases over the last several years. Low
One reason to doubt the prevalence of money laundering in the art market is the lack of capacity. As the author unwittingly illustrates, the art market just isn’t big enough to accommodate much money laundering. He cites estimates that $2T in funds are laundered globally each year. A generous measure of the art market would be $75bn and that includes a huge portion of primary work that has no resale value.
So the best case argument would make the entire art market 3.75% of the global total for money laundered funds:According to PwC’s Global Economic Crime Survey 2016, global money laundering transactions are estimated at two percent to five percent of global GDP – or roughly one to two trillion US dollars – annually. Yet, according to the United Nations Office on Drugs and Crime (UNODC), less than one percent of global illicit financial flows are currently seized by authorities.
The Art Market Report published by the European Fine Art Fair stated that transactions in fine art were worth US$75 billion in 2014. Lately, it is believed that illegal money pumped through art dealers and auction houses have contributed to the rise in the value of fine art
http://www.artmarketmonitor.com/2016/08/18/is-the-art-market-big-enough-to-launder-money/

4. NEW YORK - What Sotheby’s Means When It Says It Will Use Guarantees ‘Judiciously’
August 12, 2016 by Marion Maneker
It’s been a big theme for Sotheby’s new management to claim they are going to be more ‘judicious’ in their use of guarantees and won’t play dice with shareholders money. The subtext of these statements is always in reference to Christie’s aggressive willingness over the past several years to guarantee works of art at prices that would seem to subsidize the market instead of adding to the auction house’s profits.
Daniel Loeb made Sotheby’s failure to keep pace with Christie’s in Contemporary art a key reason for the need to replace Sotheby’s CEO. It has been an open secret that a part of Christie’s dominance in Contemporary art came from its free use of guarantees. So, naturally, Sotheby’s new CEO has been consistently paying lip service to the idea of shunning the guarantee-to-gain-market-share strategy.
Unfortunately, when it comes to practice, the new Sotheby’s has been far more reckless with guarantees than previous management. This was demonstrated by the massive—and, in retrospect, probably unnecessary—$515m guarantee for the Taubman estate.Sotheby’s recognized a small portion of the loss on Taubman but is holding $33m in works that did not sell on its books to avoid what will surely be a greater loss. Look for those write-downs to get taken in an unusually strong year or a big kitchen sink quarter.
Even with that record, Sotheby’s management continues to believe that if it says it is being more responsible than it must be true that it is being more responsible. The latest example of that was on this week’s earnings call when CEO Tad Smith re-iterated his stance in the context of his new Fine Art division team:
That team today is very focused on profitable deal making and more judicious use of guarantees, the benefits of which we are also starting to see in our financials.
If Smith is using Taubman as a comparative, the statement is strictly correct. And Sotheby’s has gotten the message out to art market participants who have been happily coining the idea:
“Sotheby’s has held the line,” said Guy Jennings, managing director of the Fine Art Fund Group in London. “They haven’t allowed consignors to eat into their margins.”
All of this provoked a bit of an outburst from one collector who emailed this comment out of frustration:
Basically, it is a seller’s market, as it has always been for the last 10 years. So what they did for Taubman, they would do it again. Look at that 100m$ guarantee they’re giving for the Ames collection. They are bogged down in the same dead-end: high estimates to catch up with the guarantee.
Despite Smith’s repeated assurances—and in the face of overall commission margins rising from 15.5% to 16.4% last quarter—anecdotal evidence of consignors getting “enhanced hammer” deals for this Fall’s auctions suggests that Sotheby’s definition of judicious includes continuing to make guarantees that will ensure a loss and offering terms on highly visible lots that will eat into commission margins.
Sotheby’s Fine Art division is clearly eager to buy market share. That ‘judicious use’ may be a defensible strategy but it is exactly the strategy that Christie’s used and Sotheby’s has long complained of. It also happens to be a strategy that Christie’s appears to be on the edge of abandoning.
In its May Evening sales, Sotheby’s aggressively covered guarantees with irrevocable bids that locked in a loss. That was a smart move and one that jibes with Smith’s repeated use of phrases like “hedging.”
A hedge does not mean protection against a loss; however, it means a mitigation of a potential loss.
Nowhere was that better demonstrated than in Smith’s response to an analyst’s direct question on guarantees and the meaning of “judicious use.” Smith’s response, which you can read below, amounts to saying that it’s all on the Fine Art Division’s Amy Cappellazzo and Adam Chinn.
Here’s the earnings call transcript:
Oliver Chen, Cowen & Company
Congrats on solid results. Tad, on your prepared remarks, we were curious about your statement about more judicial use of guarantees. What’s the incremental lens that you are using just to make sure that that is in the right place in terms of how those are taking place? Thank you.
Tad Smith, Sotheby’s – President and CEO
Okay. With respect to the first question on guarantees, my view is what is the profitability and risk balance on guarantees. I think we currently have approximately $100 million of net exposure to guarantees as of the end of the quarter, plus or minus. And I expect a good portion of that to be covered by hedges.
But the truth of the matter is I am thrilled with the team and the pricing excellence of the contemporary team. And frankly, the Modern Impressionists and many other teams, too. And so I feel very comfortable that a combination of understanding the value of the underlying works, having a clear sense of how they will sell in the auction room, gives me a higher degree of confidence that our guarantees are judicious. And frankly, we have a strong bias to hedging guarantees.
So the way to hear that is we are unafraid to make guarantees because we have a high degree of confidence in our team. And the conference [confidence] in that team is borne out by that team’s ability to both hedge where it makes sense or make — or get profitable returns from guarantees in the auction room. I feel quite good about it, and I expect you will see more of the same, which is that we are willing to use guarantees and we are also hedging them very aggressively and thoughtfully.
How Sotheby’s Found a Path to Higher Profits  (The New York Times)
http://www.artmarketmonitor.com/2016/08/12/what-sothebys-means-when-it-says-it-will-use-guarantees-judiciously/



repeatedly appears among the constellation of individuals connected to the use of the 1MDB funds.