Analyst Upgrades

• Exxon Mobil (XOM), Netflix (NFLX), Noble Corp. (NE), Pioneer Natural (PXD) and Noble Energy (NBL) to buy from neutral at Goldman.
• Cenovus Energy (CVE) to conviction buy from neutral and Atwood Oceanics (ATW) to neutral from sell at Goldman as well.
• Southern Company (SO) to buy from hold at Citigroup.
• Chevron (CVX) to buy from neutral at BofA/Merrill.
• Ryder (R), Entergy (ETR) and Seaspan (SSW) to buy from hold at Jefferies.
• Gerdau (GGB), Crown Castle (CCI) and American Tower (AMT) to buy from neutral at UBS.
• Aon (AON) and Willis Group (WSH) to buy from neutral at Janney Capital.
• Ryland Group (RYL) to buy from neutral at Ticonderoga.

After a dismal 2009, there is hope for the art auction segment. There was reason for optimism at in the past quarter, as the major houses started to move impressive pieces again, and momentum continued through the beginning of this year. Now, we're getting ready to move into the busy months of May and June. Unlike last year, auctioneers, collectors and dealers seem to be ready to play.

May 2008 was essentially the last hurrah of an art market rally that had lasted several years and created incredible amounts of paper canvas and bronze wealth. It was at this point that Sotheby's (BID) sold a fairly late triptych by artist Francis Bacon for an incredible $86 million to Russian billionaire Roman Abramovich, a transaction that has become the poster child for the excesses of the art market.

Famous auction entity Sotheby's (BID) posted its fourth-quarter numbers Monday. The market liked them. Late in the trading day, shares were up more than 7%, easily topping the 30-day average mark.

One reason investors were keen to give Sotheby's a bid is the absence of red ink. A year ago, the company lost 14 cents per share. During the last three months, $1.09 per share was booked. Total sales increased over 30%, which helped out, but net auction sales unfortunately saw a downturn of 7%.

The art market spent a year and a half circling the drain. Signs of life at the end of 2009, however, have become a reality, with recent auctions at Sotheby's (BID) and Christie's (CRUPF) exceeding expectations and showing triple-digit growth from comparable auctions last year.

Overall, art prices last year were off around 50%, with the contemporary art sector suffering even more severe declines of up to 70%. With prices this low and a recovery taking shape, it's time for investors to get in, and it looks like we'll see an art rally this year.

Sotheby's (BID) closed at $22.45. Sotheby's and Christie's hosted postwar and contemporary art sales in London this week. BID is expected to report Q4 EPS in late February. March option implied volatility is at 63; April is at 58; above its 26-week average of 55, according to Track Data, suggesting larger price movement.

Darden Restaurants (DRI) closed at $38.05. Darden is hosting an investor meeting on February 17. March option implied volatility is at 31, July is at 34, below its 26-week average of 36, according to Track Data suggesting decreasing price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Christie's and Sotheby's (BID) were only able to pull in a combined $482.3 million on five high-profile art evening auctions in New York and London this year -- down 75% from 2008. Last year, the same collection of flagship auctions was good for $1.97 billion, which was off from the $2.4 billion record set in 2007. This year's performance still lags 2006's $1.1 billion aggregate tally.

From 2003 through 2007, the contemporary art market grew by a factor of eight, according to data from ArtPrice, yet the fun came to an abrupt halt in the fourth quarter of last year, thanks to the collapse of Lehman Brothers and the near-collapse of American International Group (AIG), which Sotheby's losing $50 million and Christie's $40 million, as pieces were unable to reach the prices guaranteed to sellers by the auction houses (a practice which has since been abandoned).

Sotheby's (NYSE: BID) had a great night this week, tripling the performance of competitor Christie's (OTC: CRUPF). But, it didn't come soon enough to help the company's third quarter results.

The auction house suffered from the art market slump that was exacerbated by the global financial crisis, posting a net loss of $57.8 million (89 cents a share). This is worse than the $47 million loss (73 cents a share) it delivered a year earlier. Three analysts that Bloomberg surveyed expected a loss of 29 cents a share. Revenue was off 41% to $44.9 million for the quarter.

Here are some highlights from last week's earnings coverage from BloggingStocks:

• American International Group Inc. (NYSE: AIG) said its earnings report would not include a conference call.
• Caterpillar Inc. (NYSE: CAT) shares rose after it reaffirmed the 2009 outlook and forecast further growth.
• Cisco Systems Inc. (NASDAQ: CSCO) said its Q4 numbers tumbled despite cost-cutting efforts.
• Comcast Corp. (NASDAQ: CMCSA) posted strong Q2 results, though its cash flow was flat.
• Crocs Inc. (NASDAQ: CROX) reported better-than-expected Q2 results and forecast a return to profitability.
• Electronic Arts Inc. (NASDAQ: ERTS) revenue surged in Q1 and its narrower loss beat expectations.

An embittered Sotheby's (NYSE: BID) has turned in its first quarterly profit in a year, showing signs that the worst of the art market slump may be over. The company, which has seen contemporary art auction prices fall 76.2% from May 2008 to today, reported a decline of 87% in earnings for the second quarter, but company CFO William Sheridan says that the worst of this market is behind us. Sell-through rates are up, with more inventory moving likely to help with sagging revenues.

But commission revenue seems to be headed in the wrong direction. For Q2, Sotheby's reported commission revenues at 21.3%, up from 41% year-over-year. Unfortunately, this isn't the measure you want to go up. Lower-priced pieces tend to have higher commission rates, meaning that the auction house's Q2 performance was dragged down by less desirable inventory.

Damien Hirst has gotten to the point where the sound of his own voice isn't good enough – now he needs a record of his thoughts for the ages. He and fellow artist Richard Prince (who actually has some talent) discuss the pains of the art market in Requiem II, which is scheduled to be published by Other Criteria this fall. Of course, Hirst is one of the publishing house's founders, making one wonder if this is the only most effective way for him to get a book published.

If a recent interview with ArtNews is any indication, Requiem II will contain the insights you'd come to expect from an artist of Hirst's caliber. My personal favorite: "Yeah, we ain't gonna sell as much art, art shows are gonna get better now the focus shifts away from money."

Brilliant.

• Picasso painting fails to sell – There was no buyer earlier this week for a 1971 Picasso painting, "Woman with Hat," estimated by Sotheby's (NYSE: BID) auction house to go at bid for $16-24 million. Further, an Alberto Giacometti 1951 bronze sculpture of a cat, also with a $16-24 million estimate, was withdrawn. Sotheby's said each fell below their reserve prices, The Associated Press reported.