Angelos Joins Jeff Seder in Maryland Bid

Blow Horn Equity LLC, headed by Jeff Seder, who founded and runs the bloodstock advisory firm EQB, Inc., has just announced that Baltimore Orioles owner Peter Angelos and family will be joining forces with Blow Horn Equity to bid for the Maryland Jockey Club properties now owned by Magna Entertainment. The auction is scheduled for January 8th in federal bankruptcy court.

According to a press release issued this afternoon, the joint Blow Horn Equity - Angelos family bid will go forward despite the ongoing uncertainty over whether the slot machine license earmarked for Anne Arundel County, where Laurel Park is located, will be awarded to developer David Cordish's Arundel Mills shopping center, just up the road from Laurel. The slots license had been intended for Laurel, but Magna generalissimo Frank Stronach decided he could ignore the rules and didn't pony up the required deposit with his application. As a result, the state had no choice but to accept the competing bid from Cordish, a decision that has now been confirmed by the Anne Arundel county government.

While the bidders would certainly like to have the slots decision overturned -- and Angelos is a prominent player in Maryland Democratic circles -- they say the bid is based on racing, not slot machines. Of course, the MJC properties -- Laurel, Pimlico and the Bowie training center -- are worth a lot less without the operator's share of the slots revenue.

Angelos is a Baltimore trial lawyer who got rich representing plaintiffs in major asbestos, tobacco and diet-pill cases. In 1993, he led the investor group that purchased the Baltimore Orioles, and in 1998 he bought the 237-acre Ross Valley Farm in Baltimore County for his thoroughbred breeding and racing operation.

With Angelos' financial muscle, plus the private equity funds pulled together by Jeff Seder in Blow Horn Equity, the group seems in position to make a credible bid at the bankruptcy auction.

Let's hope so; they're the only potential bidders I can see who actually know something about racing.

There They Go Again - NYRA Takes on NY State

New York State Comptroller Tom DiNapoli, the state's chief fiscal officer, has subpoenaed the books and records of the New York Racing Association (NYRA), as first reported in the NY Daily News, and later in the Blood-Horse. Like many others, DiNapoli is presumably curious as to how NYRA spent the money that it received from the state as it came out of bankruptcy in 2008.

As NYRA points out in its press release, hurried onto its website late this afternoon, the Comptroller's apparent surprise that NYRA is now running out of money is a little disingenuous. The original bankruptcy rescue plan anticipated that slot machines -- approved by the NY Legislature back sometime in the Jurassic (well, actually, it was 2001) -- would be up and running at Aqueduct by April of 2009. As we all know, that hasn't happened, and the blame lies largely in Albany, where the hapless "leadership" of the State Senate, together with the incompetence of the Governor's office and the business-as-usual non-action by Assembly Speaker Shelley Silver has meant that we don't even have an operator named for the Aqueduct slots operation, much less shovels in the ground or slot machines actually operating.

So it's not surprising that money is tight at NYRA. Handle is down, as elsewhere in the country, and purses are being cut, beginning with the upcoming 2010 Aqueduct meet. NYRA CEO Charlie Hayward may well be correct when he says that NYRA will run out of money sometime this Spring; the Belmont spring meet always loses money, because of the expensive stakes schedule that makes the meet such an artistic success. Over the years, NYRA's big money-making meets have been Saratoga and, somewhat surprisingly, the Aqueduct winter meet, the latter probably because purses are low, and the meet has an excellent off-track following, at OTBs and across the country at other tracks and ADWs. So it's likely that NYRA will limp through the winter (I certainly hope so; my partnership has two nice NY-breds who'll be running at Aqueduct), and maybe even make a small profit. But, come April, with the Belmont opening in sight and no slots at Aqueduct, another transfusion of dollars seems inevitable.

But if that's so, then why can't Charlie Hayward and Steve Duncker (NYRA Chairman), just open up the books to the state comptroller and show the reality? The state has been a very good friend to NYRA, and it seems, to say the least, a bit ungrateful not to cooperate with a perfectly reasonable request to take a look at the books and see what happened to the state's money since NYRA emerged from bankruptcy.

In its press release -- obviously drafted by a lawyer, not anyone with the slightest political sense -- NYRA makes three points: (1) the money it received from the state through the bankruptcy process wasn't a "bailout," but was really payment for the land underneath the race tracks; (2) NYRA's already regulated by lots of different agencies, so there's no need for the Comptroller's office to poke around in the books, and besides, 11 of the 25 NYRA Trustees are, one way or another, appointed by the government; and (3) there's a NY constitutional prohibition on the Comptroller's auditing of not-for-profit corporations; that job falls to the state's attorney general (Andrew Cuomo) as part of his responsibility for supervising charities.

Let's take these one at a time. First, the land. In the bankruptcy proceedings, NYRA always claimed that it owned the land. The state, through its lawyers, originally took the position that, thanks to prior bailouts, NYRA was already, in effect, a state agency, so that the land already belonged to the state. That issue was never decided by any court. In the end, NYRA agreed to turn over the real estate deeds to the state, and the state agreed to pump lots of money into NYRA. That's all. How each side characterized the transaction doesn't mean that's the legal reality of it. At best, NYRA's claim here is unproven.

Next, what about the claim that NYRA is already regulated enough? The simple answer is, so what? In its press release, NYRA notes that it's subject to oversight and regulation by the NY State Department of Taxation and Finance, by the State Racing and Wagering Board, and by a mostly comatose organization called the State Franchise Oversight Board. You know what, I don't see any reference to, say, the Securities and Exchange Commission, the State Lottery Division, or a whole host of other possibly irritating state agencies. That's not to say that NYRA should be regulated by more entities, but, hey, you're in the gambling business; regulation comes with the territory. Presumably NYRA does have financial records, and presumably they show that it's been conducting its business in a reasonable fashion. If not, then the $125,000 a month that NYRA has reportedly been paying its "integrity monitors." the law firm of Getnick and Getnick, would represent a colossal waste of money. Saying no to the Comptroller just makes you look guilty; if NYRA has nothing to hide, why not just open the books?

Third, NYRA relies on a recent decision by the NY Court of Appeals, the state's highest court, that said the Comptroller did not have the authority to audit the operations of not-for-profit charter schools, even though those schools were receiving public money. That may well be correct, as a matter of law. As a matter of politics, it's among the stupidest positions NYRA has ever taken, perhaps rivaled only by the decision in the 1970s not to operate off-track betting. As every decent lawyer knows, just because you may be right on the law doesn't mean you should go to court. Sometimes the best policy is the one that improves your long-term position, not the one that vindicates every single legal "right" that you might claim.

Cooperating with the Comptroller will, if I'm right about NYRA's finances, show conclusively that NYRA does need more money -- a situation attributable entirely to the state's own delay in getting the slot machines started. I can't imagine why NYRA would not want to do that. Unless, of course, there's something to hide. And, if NYRA's right on its legal claim that the proper oversight authority is the Attorney General, not the Comptroller, will NYRA then comply with a subpoena from Andrew Cuomo for the same books and records that it says Tom DiNapoli can't have? Somehow I doubt it.

Charlie and Steve: you guys have got to stop listening to the lawyers. Just do the right thing.

A Bid That Could Save Maryland Racing

Details have not yet been made public of the initial bids, submitted last week, for the assets of the Maryland Jockey Club -- Laurel, Pimlico and the Bowie training center. And the final auction -- assuming anything's ever final in the ongoing saga of the Magna Entertainment bankruptcy -- won't be held until January 8th. We know that bids are in from real estate developer Carl Verstandig, partnering with a California gaming company, from the Cordish Co., which operates the Arundel Mills mall near Laurel, and from the De Francis family, whose prior stint at the helm of the MJC was somewhat less than stellar. And we suspect that, one way or another, Farnk Stronach will try to hang onto the tracks, either using his personal money or, if he can get away with it, using funding from one of his tame subsidiary corporations, at the usual expense of minority shareholders.

For those of us who would like to see racing continue, and even thrive, in Maryland, none of these bids exactly makes the heart go pitty-pat. Stronach and Joe De Francis have already demonstrated their incompetence, and both Cordish and Verstandig are completely unknown quantities in racing; one always suspects that a developer buying a race track is a lot more interested in its real estate value than in the racing itself.

But there is one bid that might actually make a difference. Blow Horn Equity LLC, headed by Pennsylvania horseman Jeff Seder, announced today that it had submitted a fully funded bid for the MJC properties. It's one of the more exciting ideas that I've seen for actually reviving racing.

Jeff is the founder and CEO of EQB, Inc., a racing advisory service and bloodstock agent based in southeast Pennsylvania. EQB has pioneered the use of a number of scientific techniques for analyzing race horse prospects, including heart scans and, for the two-year-old sales, gait analysis using slow-motion video. Jeff and his colleague Patti Miller have advised most of the country's leading owners, and have selected for purchase many many Grade I and Breeders Cup winners. There's more on EQB, Jeff and Patti here.

[Disclosure: I'm a friend of Jeff's and Patti's and, for the past several years, have played a minor role in their selection of yearlings at the Keeneland September sale.]

he Blow Horn Equity proposal -- the company is named for the highly dangerous Blow Horn Corner near the EQB office -- is funded by private equity, and, like the De Francis proposal, is based on having slot machines (or, if you prefer, video lottery terminals) at Laurel Park. Both bidders assume that the award of a slots license to the nearby Arundel Mills mall can be derailed, either by having the county government refuse zoning permission or by the state's reopening the licensing process. The only reason the license wasn't awarded to Laurel in the first place is that Frank Stronach thought he was above the law and didn't bother to submit the required cash deposit with his bid. Even without specific knowledge of the bids for the MJC, there's substantial opposition to awarding the license to Arundel Mills, which already has a pretty high incidence of crime, not likely to be lessened by the presence of the slot machines.

Under the Blow Horn Equity proposal, a temporary slots facility, with 2,375 machines, could be up and running within six months' of the award of the license, and a full-scale casino would be ready within three years. Considering that New York has now been waiting more than eight years for slot machines at Aqueduct, that's not a bad timetable. Estimated revenue from the slots, to be shared between the state, purses and the breeding program, would be $350 million in the first two years and up to $500 million once the full-scale casino was operating. Even a modest portion of that for purses and for breeders would probably keep Maryland racing alive and healthy.

What makes the proposal exciting, though, is that Jeff is one of the few people in racing who's able to think outside the very small box of received ideas. He's had substantial business experience, as CEO of a textile company and of a Southern California department store chain, in each case engineering turnarounds that left floundering companies newly profitable. And he has a far better record as a money manager, for trusts and pension funds, than most of the folks on Wall Street. He's also a pretty smart guy, with a B.A., a law degree and an M.B.A., all from Harvard, and over 30 years of involvement in scientific analysis of race horse performance.

Jeff's also the founder of the Big Picture Alliance, a foundation that trained over a thousand inner-city Philadelphia teens in video and film techniques and produced over 250 films, not to mention the effect it had on keeping a good number of those kids in school and on the path to productive lives. One can guess that he'd have some useful ideas for involving the similar population in Baltimore that lives around Pimlico.

At this point, I haven't discussed with Jeff any specific ideas for upgrading the Maryland tracks, or for attracting new racing fans. I do know that, if any of the bidders for the MJC properties are able to come up with new ideas that will reinvigorate the spot, he's the one most likely to succeed. Let's hope the bankruptcy court comes to the same conclusion.

The Bids are in for Maryland Tracks

Yesterday was the final date for interested parties to submit bids for the Maryland Jockey Club piece of Frank Stronach's bankrupt Magna Entertainment empire, comprising Pimlico and Laurel race tracks, the Bowie training center and an OTB. According to the Baltimore Post, one of the bidders is none other than the same DeFrancis family that owned the tracks prior to their sale to Stronach in 2002 and that, to be kind, is viewed with less than total love and affection by most in the Maryland racing community.

The names of all the bidders will be forwarded to Maryland state officials on Monday, but we already know that there's a competing bid from real estate developer Carl Verstandig, in partnership with an unnamed California gaming entity. Among other possible bidders are the family of Peter Angelos, the owner of the Baltimore Orioles, and a group headed by a well-known racing industry figure from Pennsylvania. And there's always the specter of Frank Stronach himself cobbling together some kind of bid, using either his own personal money -- which he may have more of now that General Motors has cancelled his deal to buy Opel -- or once again using his various controlled corporations to pony up the needed cash, at the expense of minority shareholders.

Other potential bidders have been mentioned from time to time, but as of now there's no definite information that any of them submitted bids by Friday's deadline. The actual bankruptcy court auction is scheduled for Friday, January 8th, which will give Maryland a bit of time to exercise its right to match the winning bid. Not that I could imagine any state government paying to buy racetracks in the current economic squeeze. But the state's primary concern is keeping the Preakness in Maryland, and that should be reasonably secure with any bidder -- except, of course, Stronach himself, who, to borrow a term from cycling, is "beyond category" when it comes to unpredictability.

I've raced horses at Laurel and Pimlico, and I've been to the Preakness a few times. For those who don't know the tracks, Laurel is a workmanlike, perfectly satisfactory second-tier race track on the Baltimore-Washington corridor, near enough people to make a go of it with fewer racing days, better promotion and, of course, a share in the slot-machine revenue that will start flowing relatively soon.

Of course, Stronach managed to screw up the slots deal too, by deciding that he didn't have to comply with the rules saying his slot application for Laurel should be accompanied by a check for the deposit. You know, like putting some money down when you buy a house or a car. Oops, sorry, I guess people don't do that much anymore, but you get the idea. As a result, the license for nearly 5,000 slot machines went instead to the Arundel Mills shopping center, just up the road from Laurel, although that deal is currently mired in zoning conflicts. Shopping center tycoon David Cordish, who heads the group that's tentatively been awarded the slots license, was also rumored to be among the potential bidders for the Maryland Jockey Club assets in the bankruptcy court auction.

But let's assume -- which I know may be unreasonable in Maryland politics -- that a deal can be worked out whereby some of the slots revenue goes to support Maryland racing, which is on life support and which might well die without some sort of cash infusion. Lots of Maryland horse farms have already been sold or converted to other crops, and stallions have been leaving the state for the greener pastures of Pennsylvania, and along with those farms and stallions go the jobs of the people who take care of the horses and the traditions of Maryland racing that go back at least to the 18th century. Shame on both Stronach and Joe DeFrancis for letting things reach this point.

Pimlico is, to put it kindly, a bigger challenge than Laurel. The track is located in an African-American neighborhood northwest of downtown Baltimore, and affluent white would-be racegoers use the location as an excuse not to go, just as whites in Miami stopped going to Hialeah once the neighborhood around that track became predominantly Hispanic. And the track itself needs a total makeover; the barns and backstretch are run down, and the grandstand makes Aqueduct look like a luxury resort.

But with a bit of vision, a little of the slots money, and a reduced racing calendar, Pimlico might well be brought back to something approaching its glory days. There's decent public transportation, a glorious history, and a neighborhood where jobs aren't all that easy to come by. A smart track operator would make Pimlico more a part of its community, engaging the people who liove near the track as both employees and racegoers, and making going to the races once again the thing to do for Baltimoreans. That probably means running only on Friday nights and weekends, but that's a whole lot better than closing the place down.

Presumably we'll see in the next few days what the various bidders are offering, and how the legal issues surrounding the slot-machine revenue will play out; DeFrancis managed to get Stronach to give him a share of future slots money, when Stronach bought the Maryland tracks in 2002. That deal, if it's not undone by the bankruptcy court, would severely hamper any new owner's attempts to rebuild racing in Maryland. Let's hope the court does the right thing and cancels the contract. If it does, then a new operator -- i.e., someone other than the discredited DeFrancis and Stronach -- might have a chance to make Maryland racing respectable again.

Why Does Anyone Bet on the Races?

Interesting piece in the New York Times yesterday, about Jesus Leonardo, a 57-year-old New Yorker who makes $45,000-$50,000 a year as a professional "stooper," picking up discarded parimutuel tickets and cashing in the winners. Leonardo, who collects the tickets at various OTB parlors in the city, rather than the race track, appears to be doing far better than most bettors, or for that matter, than NYC OTB itself, which is the latest racing-related entity to fall on the mercy of the bankruptcy court.

That got me thinking about why any of us bet on the races at all. In my own case, I've noticed that I hardly bet these days, certainly a lot less than I did, say, 10-15 years ago, even though I'm still as much, or more, of a follower of racing.

It seems to me that there are two likely reasons, in my own case. These may be merely personal, but perhaps they shed some light on the death spiral that racing as a whole seems to be in.

First, I've become involved in owning horses -- in fact, in managing a partnership operation, Castle Village Farm, that makes it possible for lots of racetrackers and handicappers to become thoroughbred owners at a reasonable cost. The more I've become involved with the tremendous ups and downs of having our own race horses, the less the desire to bet on other peoples'. Of course, buying race horses might also be considered betting, and at a far larger scale than that of the average recreational handicapper, but if you go into the ownership game with your eyes wide open, knowing that you're not all that likely to make money, but that you'll get a lot of thrills along the way, the risk aspect seems to become less important.

Second, and perhaps most relevant for the general state of racing today, I've found that it's just too hard to beat the takeout. According to the Horseplayers' Association of North America (HANA) ratings, hardly any tracks take out less than 15% on win-place-show wagering or 19% on exactas and other multiples. Even if one is quicker and smarter than most of the other bettors, that's a huge hurdle. Now, if I bet a few million a year through a rebate shop, reducing my effective takeout to the single digits, it might be another story. But, alas, I don't have the kind of bankroll necessary for that, nor the patience for the mind-numbing computer-assisted search for miniscule overlays that's the heart of many big bettors' operations.

Fortunately for me, and for many others who might, in earlier times, have stayed with the race track because it was the only game in town, there are some much more attractive options for satisfying the gambling urge. For those who find all that handicapping too hard, and just want action, slot machines will do just fine, and they have a takeout that's usually below 10%. Of course, you don't have half an hour between plays at the slot machine, so the $20 that takes a whole afternoon to lose, in $2 bets, at the track can go in 15 minutes at the casino, even with the lower takeout. But millions of folks seem to find the mindlessness of the slots quite satisfying, and, if and when we ever get slots at Aqueduct, I'll be very happy to see some of their money make its way into the purse account.

But the real gambling rival to handicapping is poker. The game combines many of the same elements as trying to pick a winner at the track -- knowledge of the odds, good math skills, and an acceptance of fate -- you can make make a brilliant overlay bet in racing and see it ruined by a stupid jockey mistake, or you can make all the right bets in a hand of Texas Hold-Em and lose when some moron who shouldn't even have stayed in the hand gets the one card in the deck that could beat you on the river. So, in either case, you have to be satisfied with having made the right bet, even when you lose. Another similarity is that it takes stamina and determination to play the game well. Just as you have to put in the time handicapping to have even a shot at beating the races, so too do you have to put in the time at the poker table, whether real or virtual, to convert your advantage in skill into real money.

And, most important, poker has takeout rates that are far, far better than those in racing. The most you'll ever pay, in a low-stakes game at a casino, is about 10%, and the number is much less than that as the stakes rise, or in online poker, where the takeout ("rake") is generally only a couple of percent.

If we're looking for the racing fans of the future, I've seen them, and they're not coming to the races; they're at the poker tables. If racing could capture a tenth of the 20-somethings who are playing poker online or at casinos and card rooms these days, we wouldn't have to worry about declines in handle any more.

Those who argue against cutting takeout in racing say that most bettors don't even know what the takeout rates are; if they did, would anyone at all bet at NYC OTB, with its ludicrous 5% surcharge? But that argument is false even for racing; the big bettors go to the rebate shops, where they can get takeout reduced to a reasonable level. And all those young poker players are certainly conscious of the odds and the takeout rates. They're good at math, and they know what they're buying into, whether it's a lower rake, better "comps" from the casino, or a bigger jackpot (cf. Pick Six carryovers).

So, if we ever want to see those kids at the track, we have to give them a product they'll buy. And, given the competition from poker and, to a lesser extent, slots, that means reducing takeout to somewhere around 10%.

Now, the trick is to figure out how to run a race track and put enough in the purse account to keep the horsemen in the game, all the while relying on a 10% cut of the betting dollar.

Fear and Trembling in Lexington

US financial markets were closed Thursday for Thanksgiving, and Middle Eastern markets were closed for Eid al-Adha. But in the rest of the known world, markets were plummeting on the news that Dubai and its major corporations, closely linked to Sheikh Mohammed, are unable to repay some $59 billion in debt that will be coming due in the near future. European banks, in particular, were thought to be exposed to high levels of risk , as many of them had borrowed dollars and then turned around and re-lent the money to fuel Dubai's crazed building boom.

As is often the case, the Paulick Report picked up on Dubai's troubles quickly, posting an online report from Bloomberg News. The debt default story is getting massive international coverage. See, for example, here, here, and here.)

In the grand scheme of things, the couple of hundred million a year that the Sheikh and his associates spend on thoroughbred bloodstock probably doesn't matter much, one way or the other, to Dubai's future. And, for the moment, the repo men haven't actually arrived in the Persian (oops, I guess that should be Arabian) Gulf sheikhdom to start seizing the household silver. But, after apparently having had to go hat in hand to his neighbor, the ruler of Abu Dhabi, for a quick fix of $5 or $10 billion, Sheikh Mohammed might well decide that either (a) he might need to spend a bit more time on the fundamentals of governing, or (b) putting more money into a frivolity like racing at a time of financial crisis might be just the least bit unseemly.

In either case, that could be very bad news indeed for the US thoroughbred breeding industry. As I pointed out after the Keeneland September yearling sale this year, Sheikh Mohammed and company accounted for a quarter of the horses sold in the high-end Book 1 of the sale, and for more than 30% of the gross proceeds for Book 1. Take that away, and the already shaky US breeding industry may truly be on life support. As for Fasig-Tipton, in the brief time since a company closely linked to the Sheikh bought a controlling interest, F-T has been doing lots of spending to become more competitive with Keeneland. And Sheikh Mohammed himself made a rare visit to the Saratoga sale this past summer. But Dubai's current troubles suggest that particular tap may be turned off any day now.

It's way too early to know what effect, if any, Dubai's financial problems will have on racing and breeding. As of late Thursday night, the Dubai World Cup website was still promising a gala opening for the Meydan track in January and the usual gala for the World Cup in March. And the Sheikh has never been as important a force in the spring two-year-old auctions as he is at the fall yearling sales. But one gets the feeling that there may be many more shoes still to drop, with none of them boding well for racing.

Reality Check for Keeneland

Initial reaction to the results from Keeneland's November breeding stock sale seem to be determinedly positive. For example, Frank Mitchell's Bloodstock in the Bluegrass blog talks about how "the recession is over," and that there's "confidence in a down market." And Deirdre Biles' Hammer Time blog on the Blood-Horse web site concludes that there's "at least a glimmer of hope" in the market post-November.

I guess those views, reflecting the by-now-desperate hope of thoroughbred breeders, are based on the fact that the sale numbers this year declined less from 2008 than 2008 had, in turn, declined from 2007. Small consolation. The 2007-2008 decline was about 40% in average price and 45% in gross for the sale as a whole. In contrast, the decline from 2008 to this year was only 7% in the average price and 14% in the gross.

Here are the numbers for this month's sale: of 4702 horses cataloged, 2779 of them sold (59.1% of the catalog), for a total of $159,727,800, or an average of $57,477. Compare that with the 2007 results, before the financial markets crashed in 2008. In 2007, 3381 of the 5415 horses in the catalog (62.4%) sold, for a total of $340,877,200, or an average of $100,821 per head. So, comparing those peak results from two years ago with this year's numbers, we have an overall drop of 53.1% in the gross for the sale, and a drop of 53% in the average price. That's even worse than the decline in my IRA over the same period. So, if that sort of number signals the end of the downturn and provides hope for the future, we're certainly living in a world of very diminished expectations.

And those numbers from the just-concluded sale need to be adjusted for the very atypical profile of this year's catalog. When companies report their financial results, they typically exclude "extraordinary events," such as a one-time sale of assets. Similarly, the real state of this year's Keeneland sale should be looked at by excluding from the results the one-time Overbrook Farm dispersal. That dispersal sale, which is a once-in-a-generation event, involved 148 horses, which sold for $31,760,000, or an average of $214,595, obviously well above the results for the sale as a whole.

If we subtract the Overbrook horses from the sale, here's what we get for the "normal" part of the sale: 2631 of 4554 horses in the catalog (57.8%) sold, for a total of $127,967,800, or an average of $48,638.

Now let's compare that with the 2007 results. In just two years, the gross has declined by 62.5% and the average has dropped 52%. Sounds more like the housing market in Las Vegas than an industry on the brink of recovery.

I wish things were looking better for breeders; many of them are nice people, and many of them put a lot of work and love into raising horses. But the reality is that our industry is going to have to get a lot smaller. Race tracks are closing; Blue Ribbon Downs in Oklahoma is the latest. Purses are stagnant or declining, in the face of steadily rising costs. And there just isn't a market for an animal that is, as bloodstock agents like to say, "just a horse." True, stallion stud fees are coming down, but by nowhere near the 65% from their 2007 levels that they need to. There's lots more downsizing still to come.

Let's see. Breeders are losing money. Owners are losing money -- as we always have, but I suspect even more now. Racetracks are losing money on their live product, with a few shrewd ones (e.g., Churchill Downs Inc.) moving to becoming online betting impresarios, at the expense of their own horsemen. So who's making money in this environment? Oh, of course, bloodstock agents. How could I forget?

It ain't pretty out there.

Why Are We in This Business?

As everyone in the racing business knows by now, prices for race horses have dropped precipitously over the past year. At the current Keeneland yearling sale, both the average and median prices are off between 30-35% as compared to last year. It's now possible -- as it has not been for the past few years, to obtain high-quality racing prospects at what seems, by historical standards, to be a fair price.

But, in fact, even if one buys at those fair prices, the game is still stacked against the owner who actually wants to make money by owning race horses. Despite the increasing saturation of race track-based slot machines, purses have stagnated and even declined, while the cost of doing business steadily increases.

Let's look at a couple of examples to see how succesful a horse has to be on the track for its owner to break even.

First, let's look at a typical high-end yearling purchase, say for $250,000. That's not the top of the market, but it's a lot more than I tend to carry around in my wallet for impulse purchases.

On top of the $250,000 puchase price, we need to add about 5% for a commission to the bloodstock agent; you wouldn't buy a horse at that level without expert advice. That's $12,500. Throw in another $7,500 for sale expenses, including vetting all the horses that you end up not buying. Then there's insurance, which you'd want on an expensive horse. Probably $45,000 to the end of its 4-year0old year, or about 6% of the insured value annually.

Then we send the horse to Florida for breaking and preliminary training, before sending him back north (let's say Saratoga) in the middle of his two-year-old year. That's another $20,000 for training and vet, plus about $4,000 for all the increasingly expensive van rides. So far, we're up to $339,000.

Now, let's add in training the horse at the track from August of its two-year-old year through the end of its four-year-old year. We'll hire a top-level trainer, at say $125 a day, and, even if we try to manage vet costs, they won't be less than $500 a month. So, training and vet costs to the end of the four-year-old season are another $125,000. All together, we've spent about $464,000 to get the horse that far.

So, how much does the horse need to earn on the track to break even? A lot more than $464,000. The trainer gets at least 10%, and, increasingly, more like 12% of earnings; the jockey gets on average another 7%, and, at least if you race in New York, another 3% or so goes for a variety of mandatory deductions. So we have to gross up the required earnings to get back to our net target of $464,000. In fact, we'd need to earn almost $600,000 in purses just to break even.

Sure, there's some possibility of residual stallion or broodmare value at this level, but in the current market, and discounting for the time value of whatever money might come in down the road, that isn't going to be much. If we're looking at making a profit on the race track, we need that $600,000. And how many horses earn that much?

Now let's take a more modest example. Say we buy a decent New York-bred yearling for $35,000. We won't bother with a bloodstock adviser, and we'll skip the insurance. And we'll probably be tougher on the vet expenses, and place the horse with a trainer whose day rate is more like $100 a day. Using those parameters, it'll cost us a total of $80,000, including the purchase price, to get our $35,000 yearling to the end of its two-year-old year, assuming we send it to the track in August, and another $88,000 for two years of training and vet bills. So, by the end of its four-year-old year, we've spent $168,000.

Applying the same formula to gross up the earnings for trainers' and jockeys' percentages, we'd need purse earnings of $215,000 to get even on our $35,000 yearling. I've had a few horses that did that well, but it's not an everyday occurrence. Look at the lifetime earnings for horses running in New York and you won't see that many above $200,000.

And all these projections don't include all the little extra costs that go with being an owner, from lunches for friends at the turf club to, one hopes, lots of win pictures, to stakes nominations, to donations to worthy race track charities.

So, why are we in this business? Because we love horses and have a terrific ability to see the future through the rosiest of rose-colored glasses. It's a great business to be in. Just don't expect to make money.

If Not For You

If not for you,
Winter would have no spring,
Couldn't hear the robin sing,
I just wouldn't have a clue,
Anyway it wouldn't ring true,
If not for you.

Bob Dylan, ©1970 Big Sky Music

I'm pretty sure the folks at Keeneland, shaken as they may be by the bottom falling out of the yearling market the past two days, nonetheless harbor thoughts similar to those of Bob Dylan about Dubai's Sheikh Mohammed bin Rashid Al Maktoum and his entourage. Of the 222 horses reported sold on the first two days of the annual Keeneland yearling sale, 50 of them were purchased by the Sheikh's bloodstock adviser, John Ferguson, or by entities associated with Dubai's royal family, including the Shadwell Estate Co., and Rabbah Bloodstock. That's an overwhelming 22.5% of the total number sold, and an even bigger percentage of the money paid over those two days. Gross receipts for the prestigious Book 1 horses sold at Keeneland this year were $58.8 million (a 48% drop from last year). And of that sharply reduced amount, the Dubai forces accounted for $18,305,000, or mre than 31% of the gross sales. If not for you, your Highness....

If we subtract the Dubai-associated purchases from the results, then here's what's left: 172 horses sold (of a total of 418 cataloged) for $40,451,000, an average of just over $235,000. Sure, we can assume that most of the horses purchased by the folks from Dubai would have sold even without their bids, but certainly at lower prices. In fact, it's not unreasonable to assume that the average for the sale would have been a lot closer to that $235,000 than to the actually reported average -- including Dubai -- of $265,000.

As compared to their equally visible activity at the boutique Fasig-Tipton Saratoga yearling sale last month, the Dubai forces at Keeneland put less emphasis on supporting their own sires -- Street Cry, Bernardini and Medaglia D'Oro, and more on acquiring superior racing and breeding prospects at what, for them, must have seemed like bargain prices. Only 16 of the 50 horses bought by Ferguson, Shadwell and Rabbah were sired by their own stallions, compared with more than half of their Saratoga purchases.

(Shadwell and Rabbah were still somewhat active early on Wednesday, buying three of the first 50 horses to go through the ring on the first day of Book 2 of the sale, though there was little prospect for any more million-dollar-plus purchases by any of the Dubai buyers.)

With this year's purchases, the Sheikh and his associates are aquiring a lot of stellar American bloodlines. They bought yearlings, for example, by A P Indy, Storm Cat, Distorted Humor, Tapit (a new sire whose yearlings look great and who, I think, will make a name for himself quickly), Dynaformer, Ghostzapper, Kingmambo, Elusive Quality, Forestry, Rahy and Unbridled's Song, in addition to those by their own sires. They've also taken advantage of the price collapse to buy into some of the premier American female familes. With another year or two of such purchases, the Sheikh may have all the bloodstock he needs to breed the very best race horses in the world. If and when that time comes, and he cuts back on the volume of his purchases, the yearling market will be in for an even more serious shock.

If not for you....

Looking for a Good Horse at Keeneland

For the past several years, I've been part of a team that looks for horses at the Keeneland yearling sale, on behalf of cients with serious money and a serious desire to win graded-stakes races. Some "bloodstock agents" may claim to do it all themselves, and a lot of buyers just pick out a horse in the Keeneland walking ring minutes before its hip number is called for auction. But those of us --and there are many -- who are seriously trying to find the very best horses have no alternative but to put in a lot of hard work. For those who perhaps don't know the auction process, here's how it works.

Keeneland list some 5,000-plus yearlings for sale every September (though that number may, and should, shrink in response to the severe downturn in the thoroughbred market). The catalog is divided into "books," with each book containing horses that are, in general, a little worse than those in the earlier books, and a little better than those in the later books. The first two books, 1200 horses that are offered on the first four days of the sale, generally contain the horses with the fanciest pedigrees and the best appearance, as judged by the Keeneland staff. That's where the big money is, and where most of the million-dollar babies have been bought in the past.

Our group, and others like it, tries to look at every single horse in books 1 and 2, and as many as possible in Books 3 through 5, a part of the catalog that traitionally produces some of the best bargains in the sale and a good number of stakes winners. To do that, we need to work through the following steps:

First, someone looks at every horse and short-lists those that are worth a second look. Books 1 through 5 have a total of more than 3600 horses in them. That's a lot of looking, walking around Keeneland's 49 barns.

Second, the team leader looks at every horse in Book 1 and every horse that's been short-listed for Books 2 through 5. In addition, she checks with the consignors, just in case we've missed something.

Third, we do ultrasound heart scans on our short-short list, to measure the horses' cardiac function and eliminate those who dont have big enough or efficient enough hearts to sustain them at the very highest racing levels. The scans are analyzed against a database of thoroughbreds to see how they match up along the bell curve. All this can't be done while the horses are being shown to buyers, so, after an eight-hour day looking at yearlings, we start all over again at 4 pm, when showing winds down, and keep going until 10 pm or so doing the ultrasounds.

Fourth, we get a vet to review the records on those horses that have made in through the first three steps, checking the x-ray records on file in the Keeneland repository and, if necessary, scoping the horse to determine whether it's able to take in enough air to keep it running past sprint distances.

Finally, we have a very short list that we can take to the clients, the folks with money enough to buy the very best (well, the very best that Sheikh Mohammed and Coolmore aren't bidding on).

All this takes time, and that's where the problem is. With the exception of the Book 1 horses, most horses for sale are on the Keeneland grounds and available to be seen for only a day or two before they are sold. In that time frame, there often isn't the time to do all the steps described above. So some good horses fall by the wayside. If we can't have the time to do the scans and then to get the vet reports, then we can't recommend the horses to our clients, and potential bidders are lost.

Realistically, we can't wait until the morning that the horse goes on sale to ask the vet for a review; they have way too much to do. So, if we want to get the vet to look the day before, that means we have to do the cardio the night before that, i.e., two days before the horse sells. And to do that, the horse really should be on the grounds and available to be shown three days before the sale date. With 400 horses selling each day, and limited barn space, that simply isnt happening. And, because it's not, sales opportunities are being lost.

So, what could Keeneland do? (Or, what could the newly revived Fasig-Tipton do to challenge Keeneland?)

First, we need to have fewer horses per day. Maybe not the 200 per day that sell in Book 1, but perhaps 300 would be a happy medium. That would allow the next book's horses to move into the barns earlier and provide more time for buyers to see them.

Second, there needs to be more time for the vets to do their work. At present, Keeneland's repository opens at 8 am and closes when that day's sale is over. The vets are willing to work longer hours, so why not let them? Open up the repository at, say, 5 am, and keep it open as long as some workaholic vet needs it.

With all the money that Keeneland spends attracting foreign buyers to come to the sale, you'd think a little more to make the working conditions more conducive to selling wouldn't be such a stretch. It would surely help those of us who are trying to buy good horses, and isn't that what the sellers and auction houses want?

Inside the Inner Sanctum

This past Sunday, I attended my first Jockey Club Round Table, the annual event hosted by the racing world's aristocracy in Saratoga. By now, most of those interested in racing will have seen the press reports on the Round Table (here, for example), all of which focused on the call by Louis Romanet of France for the US to join the rest of the so-called civilized world and ban Lasix, at least in the more important stakes races.

But the bulk of the Round Table actually concentrated on less contentious issues: the necessary changes that need to be made to ensure a level, drug-free (except, of course, for Lasix) playing field, safer race tracks, and the assurance of retirement homes for horses once their racing careers are done. All these initiatives are necessary, minimum requirements to restore a little bit of public confidence in racing, and it's a good thing that the Jockey Club can use the influence of the 100 grandees who are its members to pull together industry initiatives, about which more later. But all these efforts, however noble, won't be sufficient to save the industry, and it's unlikely that leadership on the tough questions of downsizing and coordination will come from a group that's done so well with the status quo. As I recall, the Second Estate (the nobility) didn't do so well in the Revolution.

Not that I'm looking a gift horse in the mouth, or at least not entirely. It was nice of the Jockey Club to invite someone (me) who's a fairly persistent critic of industry self-satisfaction, and I particularly appreciate that Jockey Club President Alan Marzelli made a point of coming over and welcoming that persistent critic.

Nonetheless, the Round Table is most definitely not an occasion for an open, back-and-forth discussion of racing issues. Unlike many public programs, there is no opportunity to ask questions of, or debate with, the speakers. The meeting is carefully scripted, with speakers kept to their time limits, and the audience just that, an audience, even if it did consist of most of the important names in the racing business.

Now, for the details: the Round Table session was roughly divided between reports on race track safety and thoroughbred retirement, on the one hand, and drug testing and enforcement on the other. (a full transcipt of the Round Table is available on the Jockey Club web site.) And there is indeed a lot of incremental progress being made in these areas. For example, the Jockey Club itself has set up a free service to help people who may have acquired a retired thoroughbred research the tattoo number and identify the horse. And, as Diana Pikulski of theThoroughbred Retirement Foundation reported, the various retirement programs are expanding as fast as they can obtain more funding. The Jockey Club, which registers all new thoroughbred foals, has instituted a checkoff option so that breeders can contribute to a retirement fund when they apply for their foal papers. (Some race tracks, including NYRA, have set up their own voluntary funds, financed by the tracks and the owners, to provide additional retirement money.) All good initiatives, though they won't provide homes for the 1.3 million thoroughbreds living in North America (roughly 15% of all American horses are thoroughbreds.) As a lawyer, I found myself wondering whether it wouldn't be possible to use the emerging legal device of a "pet trust" (think Leona Helmsley, who left most of her money to her dog) as a vehicle for funding thoroughbred retirement. Though it probably wouldn't be such a good idea to entrust the funds in such a trust to the same people who've presided over the Jockey Club's and the Breeders Cup's recent investment losses.

The discussion of race track safety came, unfortunately, just before the release of the recent report on fatalities on synthetic tracks in California, and before theArlington Park accident that threatens to leave young jockey Michael Straight paralyzed -- the second such calamitous accident on Arlington's synthetic surface this year. Those development confirm what a lot ofus already knew; synthetic tracks aren't a panacea. What keeps breakdowns to a minimum is a combination of good track superintendents who have the resources to keep their surfaces well-maintained, and trainers who won't send out horses that are only marginally fit. Both those factors depend more on the economics of racing than on scientific studies.

The second half of the Round Table program, focusing on drug issues, raised a number of interesting questions, with all the participants substantially agreeing on a range of issues, except for Lasix. The Jockey Club showed some courage in inviting people who take a tougher stand than do most trainers and state regulators: Joe Gorajec, chair of the Indiana Racing Commission, Steve Crist of the Racing Form, and, of course, Monsieur Romanet, scion of a leading French racing family and chair of the International Federation of Horseracing Authorities. But, while urging tougher drug rules, including meanigful suspensions for trainers, and perhaps owners as well, and the banning of such commonly used meds as "bleeder adjuncts" like Amacar or Kentucky Red; non-steroidal anti-inflammatories like Bute and topical corticosteroids, all of which should probably be banned because they're either harmful to the horse, or mask conditions that could lead to serious injury on the track, or both.

The big issue that continues to defy agreement is Lasix. The recent South African study makes the point, as US horsemen are delighted to tell you, that Lasix does indeed have a therapeutic effect; it substantially reduces the incidence of bleeding in the lungs of horses when they're racing; horses without Laix were found to be three to four times more likely to show any evidence of bleeding than those treated with Lasix, and seven to 11 times more likely to have severe bleeding. No question; it's a drug that works.

But Lasix also is a huge performance enhancer. It's easy to understand why. For a start, the horse treated with Lasix will lose 12-14 pounds of water; that's equivalent to going from a 126-pound weight to a bug boy carrying 112 pounds. Some trainers also believe that Lasix can effectively mask the use of other drugs that may be prohibited; I understand that the better testing labs can "see" the other drugs through the Lasix, but we don't know for sure. And trainers of horses coming over to the US from Europe certainly aren't shy about adding Lasix, with good reason. Raven's Pass and Henrythenavigator looked pretty good on first-time Lasix at last year's Breeders Cup Classic, and just yesterday, Salve Germania, an Irish invader with, to be charitable, a mediocre record in Europe, came over to Saratoga and, on first-time Lasix, won the Grade II Ballston Spa Handicap at odds of 24-1, beating such established US fillies and mares as Rutherienne and Cocoa Beach.

Just as trainers have adjusted to the new ban on anabolic steroids in the US, they could adjust to a ban on Lasix, or rather a reestablishment of the ban that existed, in New York anyway, until just 15 years ago. But we've been breeding horses for two decades now that are more and more susceptible to bleeding, so the adjustment period would be difficult. Don't hold your breath waiting for the US to rejoin the rest of the world.

From my own perspective, a very interesting aspect of the Round Table was the agreement of all the US speakers on the drug issue that racing should stick to the self-regulation model (you know, the one that's worked so well to prevent fraud in the securities markets) and not, heaven forbid, have uniform federal regulation. The vehicle of choice seemed to be "interstate compacts" that would allow the various state racing authorities to adopt uniform rules without having to go back to their legislatures every time they wanted to change the rules. Now, anything that keeps racing out of the hands of the comically inept New York State legislature is probably a plus, but I wonder why there's such an aversion to unified, federal standards. Are the rules of the Food and Drug Administration, the Securities and Exchange Commission, or the Occupational Safety and Health Administration really so terrible? (Ah, I forget, to the "just say no to health care" crowd in the Republican Party, any rules that interfere with the ability of the rich to do what they want are terrible.) Racing is certainly an industry that impacts interstate commerce; why shouldn't it be subject to federal oversight?

I appreciate the opportunity to take a look inside the tent, and one must give credit for those initiatives that are underway on safety, drug and retirement issues. But oh so much more needs to be done. Can we structure a racing industry that's viable over the long term? Can we make the game attractive to new fans, and keep those we have from spending themselves out of action? OK, these questions weren't on the agenda for the Round Table, but I do think I saw a couple of very large gorillas lurking in the shadows of that conference room last Sunday.

Gotcha

Thanks to my friend Jeff Seder, of EQB, Inc., for bringing this to my attention:

The judge in the Magna Entertainment bankruptcy case has ruled that Magna Entertainment's creditors (which includes just about everybody in the racing industry) can pursue claims not only against Magna Entertainment itself, but also against its chairman, Frank Stronach, and against the Stronach-controlled company, MI Developments, that was the nominal parent of Magna Entertainment. The full story is here.

As readers of this blog already know, Magna Entertainment, which holds such major league racing properties as Santa Anita, Gulfstream, Laurel and Pimlico, filed for bankruptcy some months ago. For years, Magna Entertainment was propped up by a series of loans and equity ifusions from MI Developments (MID), often over the protests of minority shareholders in MID, who rightly accused Stronach of using that company to toss good money after bad to support Stronach's dreams of a thoroughbred racing empire.

Bankruptcy judge Mary Walrath, in Delaware, allowed the Magna Entertainment creditors committee to move forward with its effort to prove that some $125 million in MID injections into Magna Entertainment were, in the terms of the bankruptcy code, fraudulent transactions. Good news for the creditors, bad news for Frank and his compliant MID directors.

Much more is sure to emerge in the coming months.

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.

Pinhookers' Bloodbath

The Saratoga yearling sale starts Monday, and the big Keeneland sale, which determines the fate of a large number of thoroughbred breeders, is barely a month away. For the past two decades, an important factor in those yearling sales, has been the activity of "pinhookers," seeking to buy yearlings for resale. The July issue of the Blood-Horse Market Watch, a pricy industry newsletter, contains what is, to me at least, a shocking but unsurprising report detailing the economic disaster that has befallen pinhookers this year. If one needed any more proof that our industry is going through a major restructuring, this is surely the smoking gun.

Pinhookers (see a definition here) in the thoroughbred industry buy yearlings at the summer and fall sales, then try to sell the horses as two-year-olds, especially at the so-called "select" two-year-old sales (Fasig-Tipton Calder in February, Ocala Breeders Sales Co. in February and March, Barrett's in California in March, and Keeneland in April). A smaller part of pinhookers' business is buying weanlings, then reselling them as yearlings or two-year-olds. In the past two decades, their business has boomed. According to Market Watch, profit rates for pinhookers at the select sales (the price they received for selling two-year-olds less the cost of their yearling purchases and maintenance and training expenses) ranged from roughly 30% per year to as much as 90%, the latter in 2004; for the most recent years, the profit rate was 28% in 2007 and 38% in 2008. In contrast to these healthy numbers, Market Watch calculates that this year, pinhookers in the aggregate actually lost 0.2%at the select sales, the first net loss they've ever recorded.

And that figure is based only on the horses that the pinhookers managed to sell this year. It doesn't take into account the losses that they suffered on horses that didn't sell at the two-year-old sales, nor does it account for the interest that they have to pay on the working capital loans most of them take out each year to provide money for buying new stock, nor the cost of their substantial investment in land and facilities near Ocala, where most pinhookers have their base of operations. So the real loss is much, much larger than that 0.2% figure.

Using Market Watch's methodology -- the pinhooker's cost is set at what he/she paid for the yearling, and a conservative $18,000 is added for the cost of getting the horse to the two-year-old sale -- some prominent pinhookers appeared to suffer staggering losses on their 2008-2009 ventures. All these people are hard-working, honest horsemen, who do an important job in the industry. It truly makes me sad to see some of these numbers. For example, Market Watch reports that Nick DeMeric (perhaps not so incidentally, one of the nicest and most trustworthy people in the business) lost almost $2.4 million on the 42 horses he sold at the five select sales this year. (Nick also had another 14 listed as not sold). Other important pinhookers with major reported losses include Niall Brennan (loss of $1 million on 55 sold, with another 37 not sold), Jim Crupi (loss of $1 million on 36 sold; another 29 not sold), Ciaran Dunne's Wavertree Stables (loss of $1.5 million), Robert Scanlon (loss of $969,000), Paul Sharp (loss of $630,000) and Eddie Woods (loss of 1.5 million).

Among the few major pinhookers to have recorded significant profits were Hoby Kight ($386,000) and Leprechaun Racing ($303,000). Interestingly, the two women who are major players in what has largely been a man's game -- Murray Smith and Becky Thomas (Sequel Bloodstock) -- were both reported as more or less breaking even, which is a major achievement in this year's market

The Market Watch figures don't reflect any pinhooker's overall financial state; there's just too much we don't know. Were they able to sell any horses privately, and for how much? Were their yearling purchases financed by other investors, who would then have taken much of the loss? Are they using their own money, or bank loans on which they have to pay (probably high) interest rates?

Despite the reported losses, it's already clear that the pinhookers as a group are still in the yearling market. In the first major yearling sale of 2009, the Fasig-Tipton July sale in Lexington, Kentucky, I was able to identify at least 55 purchases by pinhookers, or by agents whom I know to work primarily for pinhookers. And virtually all the major players were there, with Nick DeMeric, Jim Crupi, and Mike Ryan (who purchases for Niall Brennan) all making several buys. There were probably many additional horses sold that will end up being pinhooked, as purchasers often send their yearlings to pinhookers for breaking and training, and then on to the sales for the horses that develop quickly.

The Saratoga Select Sale catalog is attractive, the auction company has made a major effort to attarct foreign buyers, and there seem to be a lot of potential bidders out on the newly remodeled grounds of Fasig-Tipton in Saratoga, but it's way too early to tell if pinhookers' financial woes will impact this yearling sale. And the really imprtant test will be the Keeneland September sale. That's when more than 5,000 yearlings, some 15% of the entire US foal crop, are offered for sale. If the major pinhookers don't have the money available to be an important part of that market, breeders will feel the economic pinch even more than they already have.

The pinhookers' plight mirrors that of the industry as a whole. We're breeding too many horses and running too many races. When companies in other industries have overproduction, they cut back, sometimes drastically. But it's hard for the racing industry to lay off 20% of its workforce -- the horses -- and harder still to make the 40-50% cuts that are probably needed to restore economic health to the survivors.

In a substantially smaller industry, there would still be a niche for pinhookers. But, like the rest of racing, that niche would be smaller, and it wouldn't have room for everyone who's a pinhooker today. Perhaps the disastrous 2009 season will encourage some to consider other career possibilities. I'd hate to see another year or two of the trends I've described above truly ruin some fine people.