Sunday, August 16, 2009

Behind the Numbers at the Saratoga Sale

As everyone knows by now, the recently completed Fasig-Tipton select yearling sale at Saratoga was a welcome change from the past year's pattern of steady declines at all thoroughbred sales. The Saratoga sale's gross proceeds were $52,549,500, for 160 horses reported as sold, compared with $41,082,000 for 142 sold last year. The average and median prices, as already reported, were also up substantially.

A closer look at the details of this year's Saratoga sale, though, casts some doubt on the upbeat message that Fasig-Tipton and industry insiders tried to carry away from the sale. The following are only a few of the factors that suggest the market for thoroughbreds has a long way to go before it reaches bottom.

1. The Influence of Sheikh Mohammed

The Fasig-Tipton auction house was recently purchased by Synergy Investments Ltd., a Dubai-based company about which it's almost impossible to discover anything (see my report earlier this year). One presumes that the purchaser is, at least, closely linked to Dubai's ruler, Sheikh Mohammed. In any event, money from Dubai was responsible for major investments at Fasig-Tipton's Saratoga sales grounds, with fancy new wrought-iron fencing, a new outdoor walking ring, and the most spectacular bathroom ever seen at a horse sale. The new F-T also made a major effort to bring in high-end foreign buyers, offering assistance with travel and the financing of purchases, as well as a round of parties to loosen up the purchasers' wallets.

But the biggest single influence at this year's sale was the presence, and the purchasing, of Sheikh Mohammed himself -- appearing on the grounds for the first time in over 20 years. The Sheikh, acting through his main man, John Ferguson, and together with closely linked buyers Shadwell and Rabbah, bought a total of 22 yearlings, for $14.5 million, an average of $660,000. That was more than double the Sheikh's typical buying at Saratoga; in 2008 he and related entities bought 10 for $4.4 million, and in 2007 they bought nine for $5.5 million. So virtually all the increase in the sale's gross can be attributed to one man.

In addition, the pattern of Sheikh Mohammed's buying this year was significantly different this year. At previous sales, he'd actively sought out new sire lines and new female families to expand his holdings. This year, in contrast, more than half the Sheikh's purchases -- 13 out of 22 yearlings -- were by his own sires, Bernardini, Street Cry, Medaglia D'Oro, Singspiel and Henny Hughes. By purchasing yearlings from his own stallions, Sheikh Mohammed was not only propping up the Fasig-Tipton sale; he was also propping up prices with an eye to encouraging breeders to keep sending their mares to those sires.

2. Demi, Where Are You?

In contrast to the ubiquity of the Sheikh, John Ferguson and the rest of the Dubai entourage, the other major international player at the top of the market -- Ireland's Coolmore -- was a barely detectable presence in Saratoga. I did see their chief bloodstock agent, Demi O'Byrne, looking at a number of horses, but they bought only one, a Giant's Causeway colt for $425,000. It's probably no coincidence that Giant's Causeway stands at Coolmore's Ashford Stud in Kentucky.

Coolmore traditionally doesn't buy a lot at Saratoga; in 2007, they bought three yearlings for $1.5 million, and last year they bought only one, but that one was a $2 million Storm Cat colt. But this year, their presence was especially elusive.

3. Creative Accounting

Another change this year is that Fasig-Tipton is reporting as "sold" those horses that did not meet their reserve price in the ring, but were later sold while still on the grounds, provided that the sale was processed through the auction company. It's fairly common for sellers to make a private deal after a horse fails to meet its reserve, and often, those sales will be processed through the auction company, especially if the seller doesn't know the buyer and wants to have some assurance that the buyer will pay up (virtually all sales at the major auctions are made on credit, with payment not due until 15 days after the end of the sale).

This year, four Saratoga yearlings were listed as "post-sales" but still included in the statistics for horses sold. If the sale was reported in a manner consistent with previous years, there would have been only 156 horses sold, rather than the 160 that Fasig-Tipton reported. In turn, that would have meant that 66.4% of the horses listed in the sale catalog were sold -- exactly the same percentage as in 2007, although still somewhat higher than 2008's 62.6% I prefer to use the percentage of the catalog that's sold as a better indicator than the traditional "percent not sold," which counts only those horses that actually pass through the sale ring. In a bad sale, many horses will be scratched before they ever reach the ring, and that reduces the "not sold" percentage. But the consignors of the scratched horses will still be taking them home unsold, just like the consignors of the horses that failed to meet their reserve.

4. Where Were the Pinhookers?

In prior years, pinhookers looking for precocious and promising horses were a significant factor in the Saratoga sales. This year, they were conspicuous by their absence. For example, in 2007, purchasers whom I could identify as pinhookers bought 17 yearlings for $4 million, an average of $235,000. And last year, pinhookers bought 20 yearlings for $3.1 million, an average of $153,500. This year, pinhookers apparently bought only eight yearlings for a total of $1.7 million, and even that total is suspect, as it includes two expensive purchases by Mike Ryan, who buys both for pinhooker Niall Brennan and for "end user" racing clients. Without Ryan's purchases, the pinhooking numbers for 2009 would be six yearlings for $850,000, the lowest total in many years.

5. Vanishing Legends

Last year, Kenticky insider Olin Gentry put together the Thoroughbred Legends Racing Stable, self-described on its own website as aiming to become the most successful thoroughbred stable in America. As reported in the financial press, the goal was to raise $75 million and purchase horses over three years, beginning in 2008. The horses were to be placed with Hall of Fame trainers D. Wayne Lukas, Bob Baffert and Nick Zito. So far, the first Legends crop isn't exactly beating a path to the Breeders Cup; in four starts at Saratoga, they've finished 4th, 7th, 8th and 10th, with average earnings per start of $1,047 (the meet's leader among partnership operations as of today, by the way, is West Point Thoroughbreds, with average earnings per start, due to their stakes horses, of $31,489).

At the 2008 Saratoga yearling sale, Thoroughbred Legends bought nine yearlings for $3.3 million, an average of just over $360,000. In addition, the Legends trainers individually bought another two for similar prices. Legends then made a major attack at the Keeneland September yearling sale, buying 29 horses for just over $12 million.

This year, Legends didn't purchase a single Saratoga yearling, not one. Lukas, Baffert and Zito did combine to buy three at Saratoga, presumably for their own current or prospective owners, but one wonders whether the grand plan has come apart, and whether perhaps only a small fraction of the $75 million target was actually raised.

6. Ahmed Where Art Thou?

Also absent from this year's Saratoga sale purchase list was leading thoroughbred owner Ahmed Zayat. In 2007, Zayat had bought five Saratoga yearlings for $1.5 million, and then went on to Keeneland, where he bought 39 more for $8.6 million. Last year, he skipped Saratoga, but continued as a major buyer at Keeneland, with 30 yearlings for $6.7 million.

This year again, Zayat skipped the Saratoga sale.We'll know in a few weeks whether his support at the top of the market will be showing up at Keeneland.

7. New York-Bred prices collapse

While the Saratoga Select sale on Monday and Tuesday produced excellent gross numbers, the New York-bred yealing sale that followed, on Saturday and Sunday, was a disaster for breeders. The gross plunged by 20% from the already weak level of 2008, and more than half the horses in the NY-bred catalog (128 of the 235 catalogued) failed to find a buyer. Without the presence of Sheikh Mohammed and his entourage, and with the numerous foreign buyers who came for the Select sale, there was simply not enough money and too many horses.

New York thoroughbred breeding has clearly expanded beyond any rational level, spurred by a generous state-bred incentive program that rewards breeders and stallion owners whenever their foals earn purse money. That fund, like pretty much everything else in the New York state budget, is now feeling pressure, and its owner-incentive awards, for running NY-bred horses in open-company races, have been substantially cut back. That means buyers of NY-breds have reduced expectations for their horses' earnings, and those lower expectations translate directly into lower bids at the auction, or, as in the case of many horses at the NY-bred sale, into no bids at all (those horses were reported, though, as RNAs with the minimum $5,000 bid, another bit of creative accounting).

From the breeders' point of view, the only bright spot at the NY-bred sales was the reappearance of the pinhookers, who had been notably absent at the select sale earlier. Leading pinhookers, including Jim Crupi, Nick DeMeric Becky Thomas and Robert Harris, all made NY-bred purchases. There are no a good many NY-breds sired by fashionable Kentucky stallions, some of which apparently make good pinhook prospects.

Still, a few pinhook purchases won't do much for the majority of New York breeders, whose mares just don't have the quality, nor the catalog page, to support a high auction price.

So What Does It All Mean?

Fasig-Tipton, under its new, Dubai-based leadership, made a huge effort for Saratoga: new facilities, a spectacular catalog, loaded with high-quality black type, active courting of foreign buyers, and a personal appearance by Sheikh Mohammed and his money. And, for one brief shining moment, it all seemed to be working. If you were a breeder with a good-looking yearling with a fine pedigree, F-T could find a buyer for you.

But, for the reasons described above, the Saratoga sale's success masks some serious problems, and does nothing to address the weakness in the thoroughbred industry. As I'm sure we'll see at Keeneland, where 25 times as many horses will be on offer as were available at Saratoga, The US recession and financial collapse means that there aren't enough buyers for the horses that are out there. Breeders have begun to realize that; the projected 2010 foal crop is down to levels last seen in the 1970s, before Coolmore and the folks from Dubai began dueling at Keeneland and sent the industry into its first speculative bubble in the 1980s. But the likely 15% cut in the foal crop won't be nearly enough. A major restructuring is heading this way, and it's going to put a lot of breeders out of business. In the long run, that's probably a good thing; we have too much racing and too many horses now. But along the way, a lot of people, especially the smaller breeders who are in it because they love horses as much as they like profits, are going to get hurt.

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