Although complacency is at an all time high (and the VIX at an all-time low), a credit event appears to be looming. This means that certain companies may have cash flow problems. Keep your eye on those deteriorating CCC high yield bonds, and read my MarketWatch article (below). The market climbed 13% in a month and many are saying the market will never go down again. This is what they say at the bottom, but with an opposite prediction.
Bottom line: This is the time to get defensive, and if you are aggressive, start building those short positions. Hint: Buying puts is less risky than shorting, and if you are wrong, you know in advance how much you can lose.
Note: If this credit event is for real, even the Fed will be unable to contain the damage (but they will try).
Why Billionaires (and Everyone Else) Loves Art Basel
By Michael Sincere (Columnist, MarketWatch/The Wall Street Journal)
Commentary: Art Basel in Miami Beach was a huge hit with regular folks and billionaires
In December, I went to Art Basel at the Miami Beach Convention Center not only to see contemporary and fine art but also to find out why billionaires, celebrities, artists, and regular people flock to this huge art show every year. Art Basel, which this year featured 267 international art galleries, is the place to go to enjoy great food, view contemporary and traditional art, watch people, and if you can afford it, purchase paintings and sculptures.
The show was very crowded, especially on the last day, and also financially rewarding for many artists and galleries. Many of the sales were for pieces between $50,000 and $300,000, but several million-dollar sales were also made, including an oil on canvas painting, “Man in Blue VI” (1954) by Francis Bacon. The asking price was $15 million. A Picasso was also sold, “Buste au Chapeau” (1971) with an asking price of $10.5 million. In addition, many sales were made in the $5,000 – $10,000 range.
Although $10.5 million might sound expensive, Picasso’s 1955 painting, “Les Femmes d’Alger (Version ‘O’) was sold last year for $179.4 million at Christie’s auction house, which was a record high. And billionaire collector Liu Yiqian paid Christie’s $170.4 million for Modigliani’s “Nu couche.” (1917).
At Art Basel in Miami Beach, visitors flocked to the Matisse & Picasso exhibition at Hammer Galleries’ booth, which featured numerous paintings by these two giants of twentieth century art. Howard Shaw, gallery president, explained: “Though known primarily for showcasing the latest contemporary art, Art Basel also includes blue-chip, museum quality works by modern masters.”
Art Basel only allows works created after 1900, and Hammer Galleries exhibited two of the earliest works at the fair: Picasso’s Danseuse espagnole (1901) and a rare Matisse, Le guitariste debout (1903). The two artists had a friendship that lasted a lifetime, but they also competed with each other artistically. Each recognized the other as his only true rival and as his greatest measure of success.
Some people might wonder why collectors pay millions of dollars for certain paintings. Both of these works have fascinating histories and share a connection to the legendary dealer Ambroise Vollard. The early Danseuse espagnole was included in Picasso’s first major exhibition in Paris at Vollard’s gallery, only a few months before he was to embark on his famous “Blue Period.”
Additionally, the 1903 Matisse (shown below) was originally owned by Vollard. After Vollard was killed in a mysterious car crash, it later entered the possession of Vollard’s young Croatian assistant, Eric Slomovic. Slomovic stored this painting and hundreds more in a bank vault in Paris. After Slomovic died during WWII, the paintings remained in the vault for 40 years. When a painting such as this has not been seen on the market for decades, it is much more desirable for buyers. After all, even billionaires like a good story.
Billionaires Love to Collect Art
One group of people, billionaires, are especially keen on collecting art, which is why so many attend Art Basel. John Mathews, head of Private Wealth Management at UBS Wealth Americas, explains. “Art Basel is one of our main events because it’s important to our clients,” he said. “Many are avid collectors or are inspired by art.” UBS has been a long-time supporter and collector of contemporary art. They are the global lead partner of Art Basel.
Do billionaires invest in art like they do stocks and bonds? “When we put together asset allocation models, we don’t include collectibles like art,” Mathews said. “It’s hard to put a value on art because there is no daily market value like a stock. The wealthier you become, collectibles become a substantial part of your overall net worth. Real collectors buy art because they like to look at it and enjoy it and are passionate about it.” They also like to show the work to their friends and family and often decorate their houses with the purchased pieces.
To better understand whether to buy art or invest in the S&P 500, I spoke with Mike Ryan, CIO of UBS Wealth Americas. “When the economy is expanding, when GDP is positive and personal income growth is rising, these are usually important drivers for demand for art.”
And what happens when GDP is negative and the stock market is plunging? “Our high net-worth clients see crashes and corrections as opportunities,” Mathews says. “Instead of panicking, they are thinking how to benefit from it. Many of our clients made a lot of their wealth because of actions they took in 2008, 2009, and 2010. It’s not only buying the S&P 500. They might have bought an office building, raw land, or art. Typically, when the economy slows down, art investment slows down. Art is just one piece of the puzzle but it’s an important piece.”
At Art Basel, I spoke with gallery owner Xavier Hufkens, who pointed out that buying art was not just about making money. “People buy art because they love the work, not just for investment,” he says. “I love to be surrounded by art. That is how I understand the world. I explain to buyers who the artist is, the history behind the work, and why I like it. One of my jobs is to help people learn how to appreciate art. To me, art is slow attention. It takes time to appreciate the work.” Learning about the history behind the painting is an important part of the process.
By the way, although there were record-breaking art sales last year, overall sales in the art community have slowed from previous years. It’s too early to say why, although some experts say that some of the buying reached near bubble proportions.
Art Basel in 2016
I highly recommend attending Art Basel in Miami Beach in 2016 (it’s always in December). The fun isn’t only at the Miami Beach Convention Center (where the main event is held). All week, there are parties, concerts, and art events in Wynwood, an area of Miami where most of the galleries are located. If you are an international traveler, you can also attend Art Basel in Basel, Switzerland (in June) and Hong Kong (in March). Attending exhibitions and viewing fine art is one way of escaping reality while being entertained.
I was talking to a 67-year-old woman who is close to retirement and wanted me to review her financial portfolio. She has a money manager with a well-known full-service brokerage firm. She was upset because she lost $30,000 in the last month. When I looked at her portfolio, I was shocked. The money manager had her 100 percent in stocks. Whenever she asked him to reduce the allocation, he protested: “It’s not a real loss until you sell,” he told her. Hogwash.
To stop the bleeding, she finally got the courage to sell all her stocks and move into cash (i.e. money market) until she finds another financial manager. Good move. In a bear market, most stocks, even stocks of good companies, will sustain severe losses. The market might go down by 20 percent but many individual stocks will go down by 40 or 50 percent. This is not going to end well for millions of people who own individual stocks. If you’re close to retirement or retired, in my opinion, you should be reducing the number of stocks in your portfolio.
By now, most investors and traders know what happened to LinkedIn (LNKD). After the company reported earnings, the stock plunged by 40%, smashing the portfolios of pros and amateurs alike. LinkedIn has a history of booms and busts after announcing earnings. In the future, before any stock announcement, there are two actions you might consider:
- If you are long a stock, you can buy short-term (weekly) put options for insurance. If the stock plunges (as happened in this case), the put options would reduce (but not eliminate) the pain. The downside is that puts on some volatile stocks are pricey, especially if you choose a long expiration date.
- Instead of being exposed to a large and expensive stock position, replace the stock with call options before a major news announcement (assuming you are long the stock). With LNKD, although you would have lost the entire amount of the cost of the option, instead of losing a small fortune, you may have lost a small amount. Example: Instead of losing $8,000 with 100 shares, you might have lost $400, the total cost of the option.
In a bear market, put options are your friend. Use them for protection or for speculation. For more information, read my book, Understanding Options 2E (McGraw-Hill).