C.M.O. 10.31.2011

As if to put an exclamation mark on the changing of seasons, Mother Nature forced all those in the Northeast used to slipping on their Havaianas flip flops to instead shod their Hunter wellies this weekend.

Another sign that the season has changed are the fall auctions scheduled for the coming week at Christie’s on Tuesday and Sotheby’s on Wednesday.  There is a total combined $400MM worth of art on the block with a Degas bronze titled “Little Dancer Aged 14” priced to sell at somewhere between $25 and $35 million.  The detail on this piece is supposedly so precise that “the wrinkle of the girl’s tights appears at her knees”.  Emmanuel Di Donna, a former specialist for Sotheby’s said, “I think [the price of the Degas] is high, but they must know something about the market”.  This might be borne out by the fact that last November only one bronze carried a low estimate of $10MM or more and this year there are three.

Also on sale this week is Gustav Klimt’s Litzlberg am Attersee, an oil by the painter that is expected to “command in excess of $25MM” per Sotheby’s.  The twist here is that this work was consigned to the auction house in July, just months after it was awarded to Georges Jorish, an 83 year old Montreal resident whose Viennese grandmother had owned the painting until 1941; when she was deported to a German concentration camp never to be seen again.  Mr. Jorisch has promised to donate some of the proceeds of the sale to build a new wing on the Museum der Moderne in Salzburg, Austria, bearing his grandmother’s name of course, where the painting hung after the war and before a multi-year process culminated in the return of Mr. Klimt’s efforts to its rightful owner.

Masterworks do not seem to be the only thing up for sale this season as there is an $35MM estimate for Roy Lichtenstein’s 1961 painting I Can See The Whole Room! . . . and There’s Nobody in It! (which brings to mind the question whether Roy’s protagonist is peaking in to a window of one of the many buildings in Washington.)

While some might question the logic of spending such money on art in such unsettled times, Phillip Hoffman, CEO or the Fine Art Group fund in London says, “there is demand all over the world for works priced $500,000 and up, and the demand for them is only making them more expensive”.  The validity of this theory is bolstered by William Ruprect, CEO of Sotheby’s who said, “some of the market volatility they’ve seen around the world, in other arenas, we think, has encouraged participation rather than diminished it in our market place.”

Given the appeal of major works at the moment also speaks to an eye for value.  There is, of course, a corollary to this in the stock market which presents itself as a preference for “value” or “growth” stocks.  The former being seen as cheap relative to fundamentals and the latter as pricey as buyers expect fast growth in the various metrics used to grade equities.

Brandes Investment Partners in San Diego has done some work in this area and found that “the cheapest 1/10th of U.S. stocks relative to projected earnings have out performed the most expensive 1/10th by 9.1% a year on average since 1968”.  A “Dogs of the Dow” gone wild so to speak.  This might be explained by what Nick Magnuson described when he said, “When investors are fearful, they want to hold comfortable, popular stocks”.

Not to be out done, the S&P 500 Pure Growth index, of which Amazon, Netflix and Apple are members has returned 3.9% a year for the last five years ending this September versus a 1.5% loss for its value sibling.  It should be noted, however, that the Pure Value index has bested its rival in the last month.

David Fondrie, manager of the Heartland Select Value Fund, which has returned 7.9% over the last 10 years versus about half that for the S&P 500 expresses this best when he says, “when Netflix fizzles, it’s painful, I prefer the downside risk of Intel, where I get a 3.4% dividend yield and low expectations”.

Hanging on to demonstrated value makes sense whether it’s a world renown artist or a blue chip stock.  As of Friday’s close October’s equity market return was 13.6% versus a negative 14.3% for the 3rd quarter as a whole.  Changing the timing slightly puts the market up 17% since October 3rd and just 6% below its 2011 peak.

Correlation is still the name of the game, however, as the median of that metric hit 0.86 a week ago Friday versus a 0.46 number going back to 1972 on a quarterly basis with 19 out of 20 stocks currently above their respective 50-day moving averages.

Additionally, Wayne Kaufman, market analyst with John Thomas Financial watches this interrelatedness closely and has seen 58 days this year when 90% of the broader S&P 1500 moved in the same direction, including 33 of the past 62.  To put this in perspective the totals for 2006 through 2010 were 14, 23, 39, 44 and 47 respectively.

Even with all of this sameness there is differentiation and much of it points towards the “risk-on” trade.  Bespoke Investment Group found that since the current rally started on October 3rd, the 50 largest stocks in the S&P gained 15.9% while the 50 smallest were up 29.1%.  This is supported by other measures including the fact that the safe-haven stocks that performed best during the 3rd quarter rout are up 6.9% since 10/3 while those that got hammered the worst are up 35.3%.

The details out of Europe are forth coming and it would appear that they will continue to be so for some time.  With much still to be decided it would seem that investors might take a clue from the best art collectors who say, “buy what you would like to have hanging on your wall, if it goes up in value that’s just the icing on the cake”.  In stocks that would appear to equate to a well valued stock with a nice chunky dividend.

Enjoy the week.

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