The world's rich are in 'wait and see mode'

The world's rich are in "wait and see mode," according to Sotheby's CEO Tad Smith.

That is how he described his affluent customers going into this spring's consignment season.

It will be a difficult one for the auction house. It will also be the continuation of a trend.

On Friday, Sotheby's reported an $11 million loss for the fourth quarter of 2015. The auction house made $73 million over the same quarter a year before. The company's share price has fallen 46% over the last year.

The art market is a cyclical business. The tough part of the cycle is, of course, when the global economy is so bad that even the auction house's super-rich customers won't shell out the cash for art, wine, and other luxuries. The last time there was a downturn, revenues plunged by around half.

We're starting to see that again now. Sales were down 44% at the Sotheby's Contemporary sale in London earlier this month, and that news sent the stock crashing 17%. Sales in Asia have also softened considerably, though Smith did what he could to sound cheery about the region on his call.

"There is a lot of focus on the markets in Asia," he said. "Share of lots sold to Asian clients has fallen somewhat, but because Asian clients have bought some valuable works of art, the share of buyer hammer from Asian clients has grown slightly."

In other words, Asian clients are buying less art, but they're buying such expensive art that it's becoming a bigger share of all art sold.

But that also may be because other segments are declining.

Careful, there

There was a bright spot in the Sotheby's results, though the business responsible comes with some risk. The company's financial services brought in 38% more revenue than the same period a year before.

The average loan-portfolio balance increased 26% to $733 million.

This is a part of the business that has grown considerably since activist investor Dan Loeb got involved with the business in 2013.

Since then, according to Moody's, Sotheby's has more than doubled its borrowing capacity in order to support the finance segment. This, the ratings agency says, has the potential to double the loan portfolio of Sotheby's to $1.3 billion.

"There is a risk that to drive this stronger growth for its lending portfolio, Sotheby's could choose to increase the loan-to-value it tolerates or extend credit to individuals with a more risky credit profile," Moody's said in a report last year.

And in a downturn, even the world's richest see their credit profile get riskier.

Sotheby's has been increasing the size of its loan portfolio significantly in order to help its customers finance deals. The cost of that credit facility has been increasing, too. Additionally, the company has assured investors that it will continue to buy back shares to support its stock price.

This is expensive stuff at a time when customers are just waiting and seeing for who knows how long. On the call, one analyst asked at what point Sotheby's would start making dramatic changes to cut costs.

"We can't talk about specific percentages in response to that," said CFO Dennis Weibling. "There are different triggers that would have to be pulled depending on market conditions. That's what we look for and that's what we practice over the years in this cyclical business."

Let's hope the market isn't trigger-happy.