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Aug 9, 2016

S3 BLACKLIGHT: Short Interest & Rodin's Hit Record Levels at Sotheby's

Sotheby’s (BID US) reported strong 2nd quarter results and is up 17% this week and 47% year to date. Sotheby’s 2nd quarter EPS was $1.51/share versus an estimate of $1.05/share and revenues were $299 million versus an estimate of $291 million but 10% below last year’s $332 million. Sotheby’s cited lower total compensation, higher commission margins and a jump in Asian art sales as the main reasons behind their strong second quarter even as overall auction total sales dropped by 16%. With the art market still “soft and spotty” forward guidance was not effusive and Sotheby’s is predicting a relatively weak 3rd quarter.

Unfavorable forward guidance may not sit well with a board of directors full of activist investors: China’s Taiking Life Insurance owns 14.4% of Sotheby’s, Dan Loeb’s Third Point 12.1%, Mick McGuire’s Marcato Capital 10.7%, Steve Cohen’s Point72 5.8% and Singapore’s Shanda Payment 2.1% (with recent FTC ruling may grow to 10% soon). Over 45%, and soon to be 53%, of Sotheby’s shares are held by these 5 investors who have historically demanded quick and material returns on their investments.

Sotheby’s short interest had been trending downward this year. After averaging $375 million in both 2014 and 2105, short interest averaged $235 million in the first three quarters of 2016. After a slight jump, to $288 million at the end of June, Sotheby’s short interest just hit a historical high of $557 million, up 162% for the year and up 93% since the 2nd quarter. Although there is still stock available to borrow we are now getting to the point where moderate increases in short interest will increase borrow costs. BID borrow costs, which were 0.25-0.375% fee last week, have increased to 0.625% this week and should jump over 1% fee by next week if borrow demand continues at this pace.

The S3 Crowding Indicator, a measure of the magnitude of shorting activity relative to market cap and float, had large crowding spikes in the beginning of August with a covering spike on August 5th, right before BID’s 17% price jump! The S3 Velocity Indicator, a measure of real time relative change in shorting activity, is validating a crowded short situation with all three trend lines moving upwards since the end of July indicating a strong shorting momentum in the security.

The momentum of short selling in Sotheby’s indicates an aggressive move to initiate or increase short exposure in the name very quickly. Short sellers are either anticipating a bit of a price reversal from Sotheby’s 2016 47% gains, a much weaker 3rd quarter art market, or a board of directors that will be pulling management in five different directions.

For more information on the above analysis, please contact:

Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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