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Wealth Never Cost So Much

By GaveKal
Saturday, July 29, 2006

One of the recurrent themes of our investment research has been that it has “never been so expensive to be rich” and that this situation will only likely deteriorate.

But even with that in mind, we have to admit that we have been floored by the recent activity at the high end of the market. Take wine, art and horses as examples. As most of our readers will know, modern art, fine wines, and horses are assets that tend to peak just before the start of a pronounced downturn of the economic cycle.

And interestingly, over the past couple of months, these assets have really been shooting up, breaking several records on the way:

- The $16 million horse.

A few months ago, a two-year-old colt who has yet to run a race drew a world record sale price of US$16 million at an auction in Florida, after a furious bidding war between Englishman Michael Tabor and Sheikh Mohammed bin Rashid al Maktoum of Dubai (could he be thinking that horses will run better than Dubai stocks?). The sale broke the previous record of US$13.1 million paid in the mid-1980s for Seattle Dancer.

Considering that very few horses ever reach winnings of US$1 million and that the all-time leading earner, Cigar, took home close to US$10 million, this is a truly mind-boggling price to pay for a horse that has yet to race a single race (incidentally, Seattle Dancer, the previous record holder, went on to win a paltry US$150,000, racing only five times in his short career).

- The unbottled 2005 Bordeaux.

In the world of wine investments, Bordeaux is king, with up to US$3.7 billion worth of wines changing hands every year. Over the past twelve months, much to Charles’ chagrin (who likes to say that he is now too old to drink cheap wines), the price of top vintages have surged more than +45%. Much of this latest rally can be attributed to the - yet to be bottled - 2005 vintage. The 2005 vintage from some of the top chateaux are reportedly selling for around US$9,000 per case; as a comparison, in 2003, the same wines went for about US$3,800 per case... While investing in wine can be a very risky business, there is one undeniable advantage: if all else fails, it is a liquid asset…

- The US$135 million portrait.

A few weeks ago, Robert Lauder bought a portrait by Gustav Klimt for a staggering US$135 million, the highest sum ever paid for a painting, eclipsing a Picasso sold for US$104 million in 2004.

While we by no means would pass for art connoisseurs, prices do seem to have reached stratospheric heights. In his latest Gloom Boom Doom report, our good friend Marc Faber, describes his visit to the June Basel Art Fair, where one pure black canvas had a price tag of US$1.5 million…

Now interestingly, while the price of the finer things in life have skyrocketed, the company that handle their sales appears to have rolled over. Since its highs in early May, Sotheby’s has lost a cool –25%. Is this the shape of things to come? Is the recent frenzy in the world of “finer things” another indication that we are at the top of the cycle?

Usually, the last thing to go up in prices are rare automobiles. But then again, as George Best once said: “I spent all my money on cars and women. The rest, I just wasted”.

Good investing,

GaveKal

- Excerpt taken from GaveKal Five Corners semi-monthly investment strategyJuly 2006.

Editor’s Note: GaveKal is a full-service independent research firm based in Hong Kong, launched by Charles Gave, Louis-Vincent Gave and Anatole Kaletsky in 1999.

You can learn more about GaveKal at www.gavekal.com. To buy their popular 2005 book, Our Brave New World, click here.





Market Notes


WHEN PROFITS ARE GOOD… SELL

Corporate profits were the talk of Wall Street this week…

Everyone believes when companies are making big profits, it stands to reason that stocks will go up. It's simply not true. This week's chart shows that when corporate profit margins are high, we’re near a top in stock prices… the good news is already priced in.

When corporate profit margins are low, we're near a bottom in stocks. Corporate profits are outstanding right now… so if history is any guide, stocks could struggle over the next few years.
- Brian Hunt



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