Credit crunch hits arts; Sotheby's stock rocked

Sotheby's plummeted after a Vincent van Gogh painting drew no bids at an impressionist-art auction, prompting speculation that fallout from credit-market losses has hit the art world.

The auction in New York Wednesday by the world's second-largest art seller posted $269.7-million (U.S.) in sales, a third less than the low estimate of $401-million with commissions.

Three analysts subsequently downgraded their rating on Sotheby's. And in New York Stock Exchange trading yesterday, the company's shares fell $14.23, or 28.4 per cent, to $35.84.

The Wilmington, Del.-based auction house had promised sellers fixed prices for works by van Gogh, Picasso and other artists, regardless of whether the pictures sold - and some didn't. The shortfall might signal that the market has crested.

"If they have huge guarantees, and there are a lot of unsold lots, it could have a ripple effect on the contemporary art market," New York dealer Richard Feigen said.

Sotheby's shares have been a wager on an 11-year bull market in fine art. The shares climbed to an intraday high of $61.40 on Oct. 11.

In August, billionaire Eli Broad said art prices would fall because of credit-market losses by hedge funds and other collectors. Sotheby's stock fell in the past 10 days as U.S. bank losses on subprime-mortgage investments mounted.

Analyst Kristine Koerber of JMP Securities downgraded her rating on Sotheby's stock to "market perform" from "market outperform." Sotheby's "is carrying a lot of risk" going into contemporary-art auctions next week, Ms. Koerber said in a telephone interview.

Banc of America's rating on Sotheby's went to "neutral" from "buy" yesterday, based on a "cloudier macro outlook for the art market."

"Sotheby's offers investors a great way to place bets on these big events," just as tennis fans might put money on Roger Federer before the U.S. Open, said George Sutton, an analyst at Craig-Hallum Capital, who lowered his rating on Sotheby's yesterday to "accumulate" from "buy."

During the art-market boom, values for top contemporary works quadrupled, with Andy Warhol and Mark Rothko art scoring even greater gains.

Investors betting on a Sotheby's downdraft, sold short 8.2 million Sotheby's shares, or about 13.3 per cent of the stock available for trading, according to NYSE data on Nov. 6.

Short sellers sell borrowed shares, aiming to replace them with stock bought later at lower prices.

Sotheby's latest auction, with unsold works by artists from van Gogh to Franz Marc, demonstrated that earlier art is vulnerable, too.

"The sale's lacklustre performance suggests that key fears related to subprime/credit/housing issues may be playing out in the U.S," analyst Dana Cohen of Banc of America wrote in a note to clients.

In May, Sotheby's $278.5-million total take for an auction of impressionist art was in the middle of the estimated range, and almost all the works sold. On Wednesday, one quarter of the items didn't sell.

Christie's International PLC, the world's largest auction house, fared better at its Nov. 6 sale of impressionist art. Still, Christie's total take just beat its low estimate before commissions, and missed its top estimate by almost a third. In a May auction, Christie's came near to hitting its high estimate.

'Sotheby's went into Wednesday's impressionist sale with significant risks. Of 26 lots guaranteed, five didn't sell and 10 sold below Sotheby's estimated range, Ms. Koerber said. Van Gogh's "The Fields (Wheat Fields)" received no bids, and didn't sell. The guaranteed painting was valued at between $28-million and $35-million. Georges Braque's "L'Echo," expected to go for as much as $20-million, also failed to sell, and carried a guarantee.

Sotheby's carries bigger liabilities for its contemporary-art sale on Nov. 14, with about 78 per cent of the low value guaranteed, according to Ms. Koerber. The sales' outcome could influence confidence in the market, as contemporary-art values, up four-fold in 11 years, are most vulnerable to decline, experts said.

Sotheby's was to report third-quarter results today.