Thursday, November 26, 2009

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.

Monday, November 23, 2009

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.