A PAINTING OF WATER

lilies by French Impressionist Claude Monet called "Nympheas" sold for $36.8 million this week at auction in Sotheby's in London. It sold to an anonymous bidder (Bloomberg reported it was a collector from Asia), and was the second-highest price ever for a Monet at auction. At the same event Henri Matisse's 1942 "Danseuse Dans le Fauteuil, Sol en Damier" sold to a European buyer for $21.9 million, a record for the artist.

The stellar auction results mean big business for Sotheby's. Robbert van Batenburg, head of research at New York-based independent broker Louis Capital Markets, says the company's stock is only getting started. Why? Rich people. More precisely, super-duper-rich people.

"There's a new emerging class of wealthy people and they find great pride and status in the acquisition of art," Batenburg says. "They're looking for status-enhancing tools. A car is one example, a big house is another, and art is another."

The number of world-wide billionaires rose by 19% since last year to 946, according to Forbes magazine's latest list of billionaires. And whether they've gotten rich from the respective booms in private equity, oil or commodities, these new jet setters are big spenders. According to a 2005 Citigroup research note, the top 20% of American earners now account for between 37% and 70% of total consumption.

In many ways, there's nothing Wall Street enjoys more than watching the wealthy dropping their dollars so conspicuously. In April, Merrill Lynch became the latest firm to lauch a luxury-stock index, debuting the ML LifeStyle Index of 15 to 50 stocks that include Sotheby's, LVMH, BMW, Coach, Christian Dior and Tiffany. Citi's Plutonomy Index launched in 2005 to track spending by the world's growing ranks of "plutocrats." And Deutsche Boerse, Germany's largest stock exchange, launched its World Luxury Index in February.

Van Batenburg has strong faith in the high-margin art auction market and Sotheby's as one of the beneficiaries of increased luxury consumption. The company, which weathered a late-'90s price-fixing scandal, has seen its stock soar 197% over the past three years, compared with 35% for the S&P 500 index. He describes Sotheby's, whose only competition is privately-owned Christie's, as a benchmark of the ultra rich and the only pure play when it comes to investing in fine-art auction firms.

SmartMoney.com: What's the risk to luxury-goods companies like art auction houses if there would be an economic downturn?

Robbert van Batenburg: The last time there was a big downturn in the art sales market was in 2000-2002. Obviously this stock is sensitive to that, more sensitive than others, to the ups and downs of the ultra rich. Then the company went into a loss-making situation, it was bleeding money, because they have a lot of fixed costs. The same thing happened in the early '90s. Every time you find a downturn in the economy, these companies are positioned to suffer from that. That is the drawback of Sotheby's and other luxury companies like that. I think Sotheby's represents the benchmark of the ultra rich and the benefits of a well-running economy. It does extremely well in upturns in the economy.

SM: Why is Sotheby's the benchmark for the art market and the high-end retail market in general?

RB: There's hardly any other company like it. They're dealing in items going for $20 to $30 million. If you compare it with Tiffany, yes, people still get married and buy rings, but their items are a lot less expensive than a painting that goes for $25 million. Hermes, LVMH, Tiffany are thrown in there, but their items are much less expensive. It is the benchmark when it comes to a pure play on the ultra rich.

SM: How are current economic and art market conditions different from the last boom? Is there a greater assortment of buyers?

RB: The beauty of the current economic environment is that the wealth is less concentrated than it used to be. You see that the group of wealthy people is dispersed more throughout the world. There's scattered pockets of wealth in Asia... more wealth around the world; oil wealth, private equity people, emerging new classes of ultra rich in China and India, who weren't there 10 years ago.

I believe it was two weeks ago, Christie's had an auction of Russian art, which drew in record amounts in sales. The demand for Russian art was high from this new class of wealthy Russians. There's a new emerging class of wealthy people and they find great pride and status in the acquisition of art. They're looking for status-enhancing tools. A car is one example, a big house is another, and art is another.

Another aspect you're seeing are these extraordinarily high numbers going through in auctions. There's more motivation from sellers, new supply coming on the market and that doesn't necessarily mean that will suppress prices. Some people feel more inclined to sell, because the price is right, and there's more demand for these items. That's one of the key drivers of the company's success.

SM: Do you think art prices are at or below their peak in the late 1980s?

RB: To give you the big picture idea in terms of sheer numbers, we look at the Art Market Research Contemporary Art 100 Index (it covers 400 sectors of art). The index, in October of 1990 stood at 8600. Then it dropped to 2700 in the beginning of 1996. From 1996 it went to 12,600, where it is today. It's dramatic, but in the summer of 2000, it stood at 6400. In 2002 it dropped to 5800. So there was a lull. Now it's at a record. Since the middle of 2002 it went from 5866 to where it is today up about 115%.

Where you see the froth coming in is when the [prices of] second tier items are increasing. I'm not necessarily sure it's happening now; but those are sort of the signs that indicate whether a market is ripe with speculators.

SM: What do you mean by speculators?

RB: Art flippers. Traders in art, who are buying these assets and investable objects, and flip them quickly. This class only emerges when you have a seller's market.

SM: It sounds like the real estate boom. Doesn't that bode badly for a company like Sotheby's?

RB: We don't know how or when it ends. There's still a large amount of wealth creation going on. Look at the IPOs of private-equity funds a whole new class of wealthy people is being created. All of a sudden these guys are more liquid. And I'm not talking only about [Blackstone CEO Stephen] Schwarzman.... I'm also talking about top executives, or lower-tier executives, who all of a sudden have more liquid wealth than they had before.

SM: What other companies that cater to high-net-worth individuals do you like?

RB: Sotheby's is the only pure play [for high-end art]. Comparing it with eBay is like comparing GM and Ferrari. EBay has to sell a lot at little margins to make a living. Sotheby's only has to have a handful of auctions a year at huge margins in order to make a very good living. EBay actually benefits when an economy goes into recessions or downturn, because people are more inclined to buy and sell goods over the Internet. EBay for a long time was a growth stock; it still has multiples of a growth stock.... Sotheby's is probably more comparable with Tiffany, Saks, Hermes or Richemont [a luxury goods company]. All these companies do well when the economy is going into high tide.

SM: How much longer will the art boom last? Are there more big-name pieces for sale?

RB: We're enthusiastic. Sotheby's is doing auctions now with a lot of high-priced items. This week they have a contemporary art sale. In July there's the Turner Water Colors auction in London, which will be in the third quarter.

SM: What if the sales came in below expectations?

RB: That would be hard to imagine. The auction in May had a Mark Rothko painting that went for $73 million. [It set a record for postwar art sold at auction.] All the pieces went for the high end of the expectations. So it's hard to imagine that all of a sudden the trend will reverse for no apparent reason. And Sotheby's gives conservative estimates for their auctions.