Tuesday, March 20, 2007

New Website and Blog

My Blog has moved! You may see this blog as well as new posting at the following link:


Thank you,

Thursday, December 21, 2006

Best and Worst Stud Fees Values for 2007

Commercial Breeders will have to make important decisions soon about what stallions to use in the up and coming breeding season. The decisions they make will have an impact two years from now during the yearling sales of 2009 and later on at the races. Making such a long-term decision carries with it a huge amount of risk. I will touch upon the main risks to which breeders are exposed to each year and give my opinion on the stud fees that offer the best and the worst values for breeders for 2007.

There are four main risks that breeders face.

First, Breeders must contend with market risk. The thoroughbred industry has been going through a bull market in recent years and as a result stud fees have been steadily rising and outpacing the market, especially in the upper stud-fee ranges. Because of this, breeders are seeing their profits diminish. If the market was to fall, breeders will be stuck with significant losses, as the market would not provide them with enough income to cover their costs.

Second, breeders are exposed to mare specific risk. The risk that a mare will not get in-foal, will abort or produce a stillborn foal. In evaluating risks and costs of a breeding program breeders must take into account the fact that mares do not get in foal on certain years. Virtually every healthy mare will miss a year or more during her productive life. This risk increases dramatically as the mare gets older.

Third, breeders also have foal specific risk that they must contend with. Foals can be born with deformities, bad conformation or be too small in size to be commercial. Even the best matings produce less than ideal offspring. In an environment were only 23% of foals produced are actually profitable for breeders, anything less than an ideal foal can create a loss for breeders in the sale ring.

Finally, there is stallion specific risk, which means the risk that the stallion used will fall out of fashion. Many stallions that are ‘hot’ or commercial at the time that the breeder pays the stud fee can have a couple of off years and lose commercial appeal by the time the yearlings hit the sale ring.

Breeders may diversify and diminish the last three risks by increasing the number of mares they own and breeding to different stallions, this is why partnerships make sense in the breeding business. But breeders will always be exposed to market risk. Because of this, it is important for commercial breeders to carefully monitor the costs of their operation. The single largest cost that a breeder faces, by far, is the price of stud fees. Therefore, it is critical for breeders to demand value when selecting a stud for their mares.

The single best investment for commercial breeders in recent years has been to breed to first year stallions and selling the resulting foals in public auction. Breeders that breed to race, however, would be well advised not to use first year stallions; there is little value in them if you do not offer their first foals for sale because of their high initial stud fees. Rather, if a breeder feels strongly about using a recently retired race horse, it would be better for them to wait until the sire’s third or fourth season at stud. The gamble is better because breeders would have more information on the sire, for example by examining the weanlings or yearlings of that sire and they would be able to purchase the season at a discount since most sire’s fees are reduced during their third or fourth season at stud.

There are still very good values to be found in proven older stallions for both commercial breeders and those that want to breed to race. The following list provides my analysis of the best and worst stud fees of 2007. This list does not mean to criticize the quality of a given stallion but rather explore the value that the stud fee provides to breeders. I have divided the list in two, one for stallions whose stud fee is above $25,000 and one for those whose stud fee is below that amount.

Stallions with Stud Fees Above $25,000

Worst Values

Maria’s Mon ($60,000) Having produced stakes winners like Strong Contender, High Limit and the sensational Wait a While in 2006; the stud fee for Maria’s Mon has increased a whopping 140% from the previous year, the largest fee increase of any stallion. He has an average earning index of only 1.61, the lowest of any stallion standing for over $50,000. He produces only 5% stakes winners from foals, also one of the lowest percentages for stallions in his price range. Maria’s Mon represented very good value last year when he was standing for a $25,000 stud fee. This year’s increase has gone too far and offers absolutely no value to breeders whether breading to race or to sell.

Mr. Greeley ($75,000) One of the best and most valuable labels a stallion can receive is to be deemed a ‘sire of sires’ by the market. And so it has been with Mr. Greeley and the success of one of his sons, El Corredor. As El Corredor established himself as a very useful sire, Mr. Greeley’s foals began to exceed all expectations in the sale ring, with yearlings selling for as much as $5,700,000. Before all this happened Mr. Greeley had been struggling and he had seen his fee dropped to $35,000, and he was a great buy at that price. His current fee represents a 114% increase over 2006 but his fundamentals have not changed much. His Average Earning Index of 1.46 is pathetically low for a $75K sire. He also produces only 4.9% stakes winners from foals. He represents an extremely poor value for breeders that breed to race and commercial breeders may find the market disenchanted with Mr. Greeley if those high priced yearlings do not perform to expectation.

Best Values

Smart Strike ($75,000) what a terrific stallion this guy has been! 2.60 Average Earning Index, his CI is 2.07 so he continuously brings up his mares. He produces an astonishing 10% stakes winners from foals, half of which win graded stakes. I predict that this stallion’s stud fee will soon be in the over $100,000 range as buyers begin to figure out his true value. He is versatile enough so that his progeny win on dirt and turf. He is ideally suited for European buyers and his progeny will probably do very well on polytrack. His only down side is that his foals only sold for a median of $75,000 but these numbers should improve as foals by him out of better mares hit the track.

Successful Appeal ($40,000) what can you say about a sire who produced 9.4% stakes winners from foals and that has an Average Earning Index of 2.50 that were produced from very mediocre mares with a CI 1.35? Answer: That he is a fantastic buy at this level. We are certain that Successful Appeals numbers will improve as the products from better mares hit the track. Whether a breeder breeds to race or sell, he offers great value.

Cozzene ($35,000) there seems to be a bias against older stallions and Cozzene is definitely getting up on years. I personally do not believe that the age of a stallion is such a big issue as long as the stallion is still healthy. So breeders should take advantage of this very low stud fee. With a 2.42 AEI and 8.4% stakes winners from foals breeders cannot go wrong with this guy at this price.

Stallions with Stud Fees Below $25,000

Worst Values

Buddha ($10,000) has gotten to an awful start at stud with only seven winners from 120 foals. He has currently an average earning index of 0.32. Dramatic improvement may be needed for him to maintain any hopes of remaining in KY and even then, Breeders should not be jumping to send him mares at this price after the dismal performance of his two-year olds.

Doneraile Court ($10,000) with a 1.13 AEI he is considered a bad value even in Chile where he has done southern hemisphere duties.

Golden Missile ($10,000) this guy has been given plenty of opportunity as he boast a CI of 2.10 but has not done anything with those opportunies. He only has 2% stakes winners from foals and is another overpriced stallion at Adena that is not worth the asking price.

Best Values

Dehere ($20,000) with an AEI of 2.04 and 5.4% stakes winners, the return of Dehere to KY is good news for breeders. He is very well priced at this level and judging from Dehere’s accomplishment breeders should take advantage of this great value.

Five Star Day ($20,000) has 7.4% stakes winners from foals and consistently improves his mares. Even with a 33% fee increase this year Five Star Day remains a solid purchase at this level.

Mutakddim ($12,500) he has always been very solid and has gotten some high-class runners. It has taken breeders in the US some time to realize just how much quality this guy has. With 1.93 AEI and 5.7% stakes winners, he is worth the price.

Hold that Tiger ($10,000) great looking son of Storm Cat with a fantastic family, he is ¾ brother to Hennessy and ½ brother to Editor’s Note. Won the Grand Criterium G1 in France before placing third in the Breeders Cup Juvenile (after a horrible start). He has plenty of 2yos around who should come out running early. The stud fee for this guy will not stay this low if his first crop shows any ability whatsoever. It is not out of the question that he will be fighting for top honors among his freshman class next year with horses like Empire Maker and Mineshaft producing more late maturing foals. This horse could be the best deal at the price range. This is the year to breed to him and take a chance.

Exchange Rate ($10,000) has done wonders in Florida and remains at the same level as last year. With a 1.90 AEI he should improve by getting better mares than he has so far since his CI is only 1.37. One of the best values today especially for the regional breeders.

Sunday, December 17, 2006

New Stallions for the 2007 Breeding Season

The new breeding season is almost upon us. Starting in early February, stud farms, that are now quiet and peaceful places, will begin to function with the efficiency of large factories. Stallions all over the US will go to ‘work’ and start covering mares that will produce one of the most expensive and beautiful of agricultural products—the racehorse. As the beginning of the season comes closer, no group of stallions invites more speculation and is awaited with more fervor then the freshman Stallions. Fresh off the racetrack, these stallions have nothing but promise ahead of them. Any of them could be the next Northern Dancer, Mr. Prospector or Danehill.

Unfortunately, the reality is that most of these new stallions will fail at stud. This year will bring them the best book of mares they will ever breed to and the highest fees they will earn. Even those that are successful will still charge a lower stud fee in the next year or two. However, breeders know that market demand will be very strong for the first yearlings out of these stallions. They know that there is no better return on investment available to them than the returns that are produced by the offspring of the first year stallion.

It is important to find value when selecting a freshman sire. Although this group consistently produces superior returns than the general market for breeders, overpaying for a stud fee can greatly diminish the upside of the investment.

There are 58 sires with stud fees above $3,000 that are entering stud in the US this year. Below are my predictions of the best and worst values in this group.

Best Values

Bernardini ($100,000 AP Indy-Cara Rafaela by Quiet American) Bernardini proved to be one of the best horses of his generation. He won 6 of 8 starts and earned just over $3 Million. His dam is the Grade 1 winning mare Cara Rafaela. He is also physically the best looking horse to retire to stud this year. After seeing horses like Giant’s Causeway, Fusaichi Pegasus, Mineshaft and Ghostzapper retire to stud with stud fees higher than $100,000, I believe that even at this prize he is still a fantastic buy. Darley has priced him very conservatively; no doubt they want to have a high demand for his services and pick and chose the best mares for his first book.

War Front ($12,500 Danzig-Starry Dreamer by Rubiano) great looking colt that is also impeccably bred. He hit the board in 10 of 13 starts with 8 triple digit Beyers including a high of 114. By the great sire of sires Danzig, he is very well priced and should be very well supported at Claiborne.

Bellamy Road ($12,500 Concerto-Hurry Home Hillary by Deputed Testimony) He is a fantastic individual, winner of 4 races in 7 starts. He was the favorite for the KY Derby off a track record performance in the Wood where he recorded a 120 Beyer. He had speed to spare and showed great ability at two, he was very badly managed as a 3 year old and injuries did not allow us to see his true potential. He is very well priced; mostly because he does not have a fashionable pedigree, but he will throw good looking foals and breeders who believe in him will get a good return.

Worst Values

Giacomo ($12,500 Holy Bull-Set them Free by Stop the Music) Adena sometimes asks a little too much money for some of their stallions. Giacomo is no exception. The KY Derby winner is still not a good buy at this price. He showed he was a useful graded stakes performer but was never able to prove that his Derby win was nothing short than a fluke. With only 3 wins from 16 starts, no wins at a distance of less than a mile and a sixteenth and being by Holy Bull, who is not exactly a sire of sires, we do not think Giacomo will be a good value to breeders.

Borrego ($20,000 El Prado-Sweet as Honey by Strike the Gold) Borrego ran his best as an older horse, most notably in back to back Grade 1 races, first in California and then an incredible romp in the Jockey Club Gold Cup in New York. He was a very good horse at 3 winning and placing in many of the elite 3yo stakes and managed two wins as a 2yo. So it is not out of the question that Borrego will make it as a sire. However, he was a distance horse better suited for longer distances as shown by the fact that he never won going less than a mile. What bothers me most about him is that he was not a very nice yearling; he was awkward and did not come into his own until later in life. Breeders should take that into consideration before ending up with a non-commercial yearling and 20k in the hole.

Monday, November 20, 2006

First-year Stallions and Profitablity

On average, in 2005, only 25% of yearlings that sold at auction actually produced a profit for their breeders. That figure dropped to 23% in 2006. The decline in profitability has placed added pressure on breeders to sell a set number of their horses for a large profit in order to compensate for the losses generated by 80% of the yearlings they sell. Indeed, if breeders are unable to produce one or two horses that will sell for a large amount of money, they will show substantial losses for the year. As a result, breeders have to become increasingly strategic in their choice of stallions. One of their best alternatives is to choose a first a year stallion.

We will examine how first year Stallions have performed for the breeders that have supported them in their intial year at stud and why breeding to a first-year stallion provides powerful economic incentives for commercial breeders.

There are three main factors that commercial breeders should look for in deciding which stallions to use. First, what percentage of the yearlings by that sire are profitable. Second, what is the degree of profitability of those yearlings. Third, what is the risk that those values will not hold up by the time the yearlings produced hit the sales ring.

Percentage of Profitability

With the above framework in mind, we will begin by examining the stallions that sold yearlings for the first time this year. The table below shows stallions who stood for more than $10,000 for the first time in 2004 (the year when this year’s sale yearlings were conceived), the stud fee for which they stood in 2004 and the percentage of foals that were considered to be profitable.

Stallion/ Stud Fee /Percentage Profitable

Fee: $60,000
% Profitable: 55%

Sky Mesa
Fee: $30,000
% Profitable: 52%

Harlan’s Holiday
Fee: $17,500
% Profitable: 49%


Fee: $10,000
% Profitable: 47%

Fee: $10,000
% Profitable: 47%

Empire Maker
Fee: $100,000
% Profitable: 40%

Fee: $100,000
% Profitable: 38%

Yankee Gentleman

Fee: $10,000
% Profitable: 34%

D Wildcat
Fee: $10,000
% Profitable: 32%

Proud Citizen

Fee: $12,500
% Profitable: 31%

Hold that Tiger
Fee: $15,000
% Profitable: 29%

Fee: $50,000
% Profitable: 24%

Macho Uno
Fee: $15,000
% Profitable: 22%

Fee: $10,000
% Profitable: 14%

Century City
Fee: $12,500
% Profitable: 12%

Milwakee Brew

Fee: $15,000
% Profitable: 4%

Sligo Bay
Fee: $10,000
% Profitable: 3%

As we can see from the table above, it is one of the best investments for breeders to breed to first year stallions. Of the stallions above that stood for $10,000 or more during 2004, all but three of them produced a higher percentage of profitable yearlings than the overall market. This statistic also shows that every stallions that stood for more than $15,000 had a percentage of profitable yearlings above the average for the market. This produces a very large incentive for commercial breeders to breed to first year stallions instead of their older and proven counter parts.

Degree of Profitability

The second important factor for breeders is the degree of profitability of those yearlings. This means how much money the breeder is able to get for the yearlings of that stallion. Comparing this figure to the stud fee is useful because it can give us an idea of what the actual profit was for the breeder. Because a breeder will have higher expenses when breeding to a high priced sire because the mare he would use would be more valuable; this statistic can let us know just how profitable those yearlings are.

The table below shows the average price for the yearlings of first-year stallions and how many times their stud fee this average represents.

Stallion Average /Yearling Price /Yearling Avrg. Times Stud Fee

Yearling Avrg: $74,195
x Stud fee: 7.419

Yearling Avrg: $68,540
x Stud fee: 6.854

Harlan’s Holiday
Yearling Avrg: $101,369
x Stud fee: 5.792

Yearling Avrg: $340,516
x Stud fee: 5.675

Yankee Gentleman
Yearling Avrg: $53,954
x Stud fee: 5.395

D Wildcat
Yearling Avrg: $49,150
x Stud fee: 4.915

Proud Citizen
Yearling Avrg: $58,223
x Stud fee: 4.657

Sky Mesa
Yearling Avrg: $128,585
x Stud fee: 4.286

Empire Maker
Yearling Avrg: $379,125
x Stud fee:3.791

Hold that Tiger
Yearling Avrg: $50,397
x Stud fee:3.359

Macho Uno
Yearling Avrg: $42,589
x Stud fee:2.839

Yearling Avrg: $277,532
x Stud fee:2.775

Yearling Avrg: $101,568
x Stud fee:2.031

Century City

Yearling Avrg: $20,574
x Stud fee:1.645

Yearling Avrg: $14,868
x Stud fee:1.486

Milwakee Brew
Yearling Avrg: $18,893
x Stud fee:1.259

Sligo Bay
Yearling Avrg: $7,616
x Stud fee:0.761

We can see from the table above that some of the returns to breeders are extremely high when they breed to first-year stallions. Even if a breeder hit the jackpot and bred to the right stallion at the right time, say Distorted Humor in 2004 when his fee was $50,000 (it is now $225,000), he would have sold the yearling for an average of $297,085 or 5.941 times the stud fee. Considering how much of a gamble he was taking in choosing Distorted Humor instead of say Gulch or Thunder Gulch who also stood for $50,000 in 2004 but whose stud fee has been decreased for this year by 20% and whose yearlings sold for under 2 times their stud fees.

Risk of loss of value

A third consideration that will give a breeder a very big incentive to breed to first year stallions is the uncertainty that can surround proven stallions. A breeder’s decision on what stallion to use in a given year will not bear fruit until he brings the product of the mating to market two years later. Many things can happen in two years. A once hot stallion can suddenly go cold and his stud fee can be slashed, sometimes dramatically. Once fashionable stallions can fall out of favor. But breeders know that first year stallions will be at their peak demand when they hit the sales ring.

Monday, October 09, 2006

Keeneland: What does it take to be a truly world class auction company?

The auction room is full of expectation as lot no 11 takes center stage. There is that palpable energy and excitement that makes you feel like anything could happen. The sale has been strong so far but few lots in the sale have the quality of this one. All the big buyers are present and ready to spend very large sums. A small man with white thinning hair in the aisle seat nervously folds his catalog in expectation of the most important moment of his life, he is, without a doubt, the consignor. The bidding starts at 1 Million and quickly climbs…2,5,8 and then reaches the final number … 11.2 Million, the crowd watches silently…the hammer falls…the man with the white hair looks down to his catalog…in disappointment!

That is not a scene from a Keeneland sale but rather this is what happened on May 2 at Christies in New York during the Impressionist Evening Sale. Christies is one of the leading auction houses in the world. This sale sold 50 lots in one evening for a total of 180,280,000 that is an average of more than $3,600,000 per lot. It took Keeneland two select books and close to 500 cataloged hip numbers to arrive at a similar gross figure (182,860,000). Sure, horses are not fine art paintings but more and more the prices demanded for the very best equine prospects approaches the type of prices fetched by the elite of the art world. With these kinds of prices, should buyers expect more from top sales companies like Keeneland?

Keeneland has been hailed as an innovating company. Indeed, it has introduced many improvements to both its sale and racing operations; from installing Polytrack to remodeling its auction pavilion. Keeneland is the unquestioned leader of horse auction companies. However, are the improvements they have made enough for such a large and important sale?

In order to fully answer that question we need to know what factors make an auction an efficient market. After all, the best service an auction house can provide is to establish a market place that will set the best possible price for a particular item for the seller. Auctions are important in economics because non-commodity or unique items (such as racehorses or art) do not have an inherent price but rather auctions perform the function of establishing markets to find prices that can ‘reveal’ an underlying economic value.

In 1874 economist Leon Walras established the paramount principle regarding auctions and markets. He established the Competitive, or Walrasian principle. This principle states that if you match supply and demand in an auction market with perfect competition, you establishing a market equilibrium that arrives at the best price to the seller for the goods. This important result depends upon the auction market meeting certain conditions.

First, if markets are ‘thin’, bidders have market power, and the competitive paradigm no longer applies. However, as the number of bidders grows large, the market approaches a true competitive equilibrium. The same issue arises with collusion in auctions; collusions have the effect of thinning the market by reducing the number of participants.

Second, Walrasian markets also require, complete information regarding the characteristics of the goods (in this case horses). If there is asymmetric information on the quality of the goods allocative decisions will no longer lead to efficient market outcomes. This is because only some buyers will have reliable information, allowing them to be the only ones that can adequately participate in the market.

Economics teaches us what the requirements are to have the most efficient market in an auction. Although, a perfectly Competitive or Walrasian result is unlikely, if not impossible, in practice, Keeneland and other auction companies can take the necessary steps to align their results to the Walrasian ideal by innovating in areas that will increase market participation and information dissemination .

Thin Markets and Innovation

Virtually every major auction house in the world today has looked for new and innovative ways to increase their pool of participants. Keeneland in particular has done a great job in promoting its sale at an international level with fantastic results. For instance, turn-up of international buyers have been a key factor in supporting the middle market, in both the September and November sales.

Keeneland’s efforts fall very short, however, when it comes to increasing the bidding options for buyers.

Christie’s, for instance, offers the following options to its vast array of international and domestic clients:

Live Bidding: Buyers who attend the auction can obviously bid live for the items the want to purchase.

Absentee Bidding: Buyers who cannot attend the auction can instruct Christies to bid on their behalf up to a certain pre-determined amount.

Lotfinder On-line Absentee Bidding: prospective buyers can fill out an online form to instruct Christies to bid on their behalf up to a certain pre-determined amount.

Telephone Bidding: A telephone bid is a bid made with a Christie's staff member who calls the buyer from the saleroom and relays the buyer’s bids to the auctioneer during the bidding on their lot.

Christies Live On-line Bidding: Christie's Live lets the buyer watch, hear and bid in a Christie's auction taking place in the saleroom from the comfort of his or her computer. This new feature brings to the buyers a virtual sales room wherever they are.

When asked why Keeneland does not offer more bidding options for clients; Keeneland personnel’s standard answer is that it is because they want the buyers to attend the live auction since the excitement of the live auction is what can increase the buyer’s bid amounts. They believe that if they allow buyers to stay at home, they will somehow bid less.

This statement is just ridiculous! That would be the equivalent of Keeneland’s racing office saying that they will not simulcast races because they believe that people bet more money when they actually attend the races live. The point is not just to increase the amount of individual bids but more importantly to increase the number of bidders in the market. In addition, anyone who has ever purchased an item from an auction house via the phone or the internet can tell you that they are just as likely to over-shoot their budgets in these types of bids as they would be at a live sale.

I cannot believe that these horse-sale companies can be so short-sited. It reminds me of the decisions made by the racing industry when they decided not to telecast their races on television for fear of losing on-track handle and what a disaster that decision turned out to be! Racetracks alienated a whole generation of horse racing fans. Every other non-horse auction-house in the world that I know of falls over backward to try to increase bidder participation at their sale. Some even run tandem live sales on sites like e-bay to try to add robustness to their bidder base.

I can speculate and find other reasons why some horse sale companies may be hesitant to offer these additional services.

First, auction companies may feel that they need to attract visitors to boost their local economies. Auctions in Lexington give the city a measurable economic boost and sales in places like Ocala cause an even larger impact on the local community.

Second, auction companies may feel loyalty to the bloodstock agents that have supported their auctions during the years. Allowing buyers to place their own bids through the company without the intervention of a bloodstock agent may reduce the role of the bloodstock agent to a mere evaluator/valuator of the stock. Without being privy to specific money and bidding information agents may be hard pressed to charge buyers the 5% commission rates that they currently charge. In addition, opening up bidding options to buyers may make it more difficult for agents to defraud their principles since they may not be certain if or how much a buyer will bid on a specific horse.

Both these fears are without merit. Serious buyers will still have incentive to attend the sales or to have someone inspect horses for them. Also, even if these options erode the power of bloodstock agents, they will do so to the benefit of the market and the sellers. In addition, a cleaner marketplace will enhance the comfort of buyers to participate in the market place. It must be remembered that an auction house’s obligation is to the seller, not to the agents of the buyers and providing a healthy market place should be their first priority.

Information and Innovation

In a survey done by Keeneland; buyers and sellers alike voiced their wish to have wireless access in the Pavilion and in the sale barns. Keeneland responded by implementing a wireless network that would be accessible by buyers and sellers alike. In my recent trip to Keeneland I was surprised that I did not see even one laptop in the vicinity of the sale.

The reason for that is simple; people will not use the powerful technology if the tools to take advantage of it are not available to them. The Keeneland website is in a bad state, it takes about five clicks to obtain a result and another five clicks to check out the pedigree of that same horse. Some of its search features are useful but there is nothing there that would make someone toss away their catalog and replace it with their computer.

However, providing quality information to the buyer on the characteristics of the lots that are for sale is of vital importance to increase the likelihood of a competitive or Walrasian result. The computer age provides new tools that should be given to buyers so that they can make the best decisions and participate in the market with added confidence.

First, Buyers should be able to access a virtual catalog that can be tailored to show the information that they consider relevant and print out a customized copy of that sale’s catalog. They should be able to create wish lists of horses they would like to consider for purchase and be able to sort them out by hip-number, barn number, consignor etc. to make it easy for them to look at the horses in the morning or bid on them in the afternoon.

Second, the information made available through the website should be more comprehensive than the information in the catalog. Sellers should be able to put additional information up regarding each hip-number on the sale’s company website. Important information such as reserve price, photos, videos and veterinary certificates could help buyers better determine whether a horse is in their budged and whether a horse is worth inspecting. This would facilitate a buyer’s work and increase his productivity at the sale. Most sellers are already willing to provide this information to buyers.

Third, sales companies could negotiate with third party information providers like Werk, Brisnet, DRF, Equine online etc. so that users can obtain that additional information for sale prospects at better prices.

In this way the sale’s company’s website will also serve as an informational depository of all relevant information, a true one stop shop for buyers.

The fact of the matter is that horses are under-valued items because, on average, their markets are not robust enough to provide for a competitive market place for each lot. The reason is that in horse sales participants do not have all necessary information for all lots and companies tend to provide very ‘thin’ markets.

Horse buyers must be interested in a particular horse and be present in the sale ring at the exact time the horse goes through the ring in order to bid on a particular individual. Therefore, there are usually only few individuals that are present with the intention of bidding on any one horse. Opportunity buyers, who could iron out the inefficiencies in the market, are virtually non-existent because they cannot obtain information quickly on a particular individual and must be always present at ringside.

The closer a company gets to provide the sellers with a robust, confident market place and providing buyers with relevant, easy to access information; the more competitive the prices will be for each and every lot in the sale and the more the market will assign a true price to the horses involved.

Monday, September 11, 2006

First Year Stallions

One of the most difficult things to explain to a newcomer to thoroughbred racing is the phenomenon of the high prices paid for yearlings from first year stallions. In any rational market investors demand to get paid for taking on risk. However, in thoroughbred sales, buyers will usually pay a premium for the progeny of unproven first year stallions even though they are taking on the additional risk that the stallion will fail.

On average, the first yearlings of a stallion to go through the ring will be the most expensive yearlings the stallion will ever produce. Even though, it is also true that the stallion’s first yearlings will usually be out of the best group of mares that he will ever be bred to, there is no guarantee that these yearlings will prove to be a good value.

One of the reasons for the premiums buyers pay is the amount of media attention given to first year sires. Virtually every reporter spends an inordinate amount of time to covering the stallion’s progress and giving his opinion on what the future holds for said horses. This type of coverage creates a great deal of ‘buzz’ among industry professionals and amateurs alike. This ‘buzz’ attracts prospective buyers to look at foals by these stallions and eventually to purchase them.

Another reason for the premiums is the amount of advertising that farms do for their first year stallions. The goals of the stud farms is to fully recover their investment in stallions by the time the stallion’s first yearlings hit the track, in order to offset any risk to them. Therefore, they promote their stallions heavily in order to attract the largest group of mares possible during these first years. At the same time breeder’s flock to these stallions because they know that they will not find a better ROI than when selling foals by first time stallions, also at little additional risk to them.

The buyers of the yearlings end up taking on the risk of failure by racing the foals. This risk is compounded by the fact that they typically overpay for these horses. This was the case at the Fasig Tipton Select Sale earlier this year where the sale topper was a $1.6 Million Empire Maker filly, followed closely by the second most expensive foal, a $1.45 Million Mineshaft filly. Both these yearlings are by first year unproven stallions. Clearly the buyers of these horses are spending their money assuming that these stallions will be very successful. Why not wait and let the stallions prove their worth? Can anyone really justify spending these sums of money for unproven stock? Have the buyers of these yearlings forgotten Alysheba, Spectacular Bid or Dayjur, stallions that demanded high prices early in their careers and turned out to be failures at stud?

I do not mean, however, that there is no value to be found in purchasing yearlings by first year sires. Rather that value is more difficult to come by-especially at the top end of the market. Part of the problem is estimating the fair value in the progeny of unproven sires.

The most common method to value a new sire’s foals is to reference how those sire’s weanlings and short yearlings have been selling. This is the wrong approach because, as we have established, the market overvalues these prospects. The safer way to evaluate these yearlings is to carefully evaluate the conformation of the yearling and the quality and production history of its dam and give a value based on these two factors. Once a fair-value based on these two factors is established, a buyer should demand a discount that represents the additional risk she is taking on by purchasing stock of an unproven stallion. If this method is followed buyers can still find some value in first year stallions.

Thoughts on some of the new and more expensive Keeneland stallions for this year’s September sale:

Mineshaft ($100,000 fee) By AP Indy. He was a monster of a racehorse and he has all the right credentials to be a top stallion even at this price range. He represents the safest bet to stick around in the future. But at what price? Be leery about his early years at stud. Aptitude, also by AP Indy, has taken a couple of years for his progeny to show something at the track and Mineshaft is a good candidate to produce latter maturing foals. He did not win a stakes until his four year-old season. Next year or the year after would be a better time to buy yearlings by him, after his two year-olds show a lack of early ability.

Empire Maker ($100,000) by Unbridled. A very good three year old. This guy has been over hyped since the day he was born. His dam is the great mare Toussaud, he could not be better bred. Unbridled was a horse that could produce great horses but his overall numbers were not fantastic. This stallion is late maturing, without early turn of foot and his bottom half of the pedigree suggest distance and grass. His half brother Chester House died early and showed little at stud. With a weanling average of close to $900,000 everything has to go very right for him to be at that level in a couple of years.

Vindication ($60,000 fee) By Seattle Slew. Although this guy is no AP Indy, he was a very solid juvenile runner winning the Breeder’s Cup Juvenile. He is a well-built horse, although more refined and with less bone than AP Indy. Comes from a line that has produced great horses like Slew O’Gold, Seattle Song, Slew City Slew, Doneraile Court and Event of the Year but none of those were great in the breeding shed, AP Indy being the sole exception. With a yearling average expected in the $300,000 range, save your money and buy a nice something else by a proven sire.

Aldebaran ($40,000 fee) By Mr. Prospector. Hard to knock one by Mr. Prospector. Aldebaran was one of the best and most consistent sprinters of the past few years. But this horse was a late developer without early speed. It was not until his 5 year-old year that he won a grade 1 stakes. Of course, being by Mr. Prospector he should sire early and speedy foals but there is still a risk that they will be late maturing. It may be wiser to wait and see what kind of a sire he turns out to be. Having said that, at this fee level, some yearlings by him may still offer value.

Sky Mesa ($30,000 fee) By Pulpit. Great looking early maturing horse who won the Hopeful at 2. Injury prevented him from following up on his three year-old campaign. Better fee range can offer value at the sales but outstanding physical individuals by him will still demand high premiums. Interesting prospect.

Other prospects that stand for below $20,000 will be more likely to offer the best opportunities for buyers who want to invest in new Stallions. Stallions such as Harlan’s Holiday, Proud Citizen, Yankee Gentleman and Kafwain as well other regional stallions may provide value to daring buyers. But the best value a buyer can obtain will always come from proven sires!

Buyers should always demand a premium for taking on the risk for trying out these new stallions. The buyers are the ones that have the least to gain from making a success out of these first year sires and they are the ones that have the most to lose if these stallions prove to be failures.

Wednesday, September 06, 2006

Thoroughbreds: A bubble market that continues to race

Where have all our bubble markets gone?
The internet boom has long past and the housing market is about to experience what some foresee as a soft landing and others a hard crash. But there is one market that continues to rally against all logic – the racehorse market.

On Monday, September 11, the Keeneland Yearling Sale, the largest sale of thoroughbred racehorses in the world, will begin in Lexington, KY. More than 5,000 horses will go through the ring during the sale’s 14 days. It is the premier sale of thoroughbreds in the world.

This market has experienced amazing growth in the past five years. The mean price for a thoroughbred has risen an incredible 60% from $25,000 in 2001 to $40,000 in 2005. While the average price reached a record high of $108,420 at last year’s sale which included a sale topping colt that sold for $9.7 Million.

These prices, mind you, are for unproven one year-old thoroughbreds that have yet to run a race at the track. All a buyer can do to evaluate these horses is to review the pedigree page printed on one of the seven catalog books given out by Keeneland to prospective buyers and to inspect the horse’s physical attributes. It is a little like drafting 8 year-old boys to play as adults for NFL teams - it’s all guess work at this stage!

But this market is an international melting pot that brings together buyers and sellers from all over the world and from all walks of life. From kings of faraway lands to small investment syndicates from New Jersey, there is something for everyone at Keeneland. With more than 5,000 horses to be sold, all these buyers come here with the realization that greatness is present - all one needs to do is find it.

Many reasons are given to explain this dramatic increase in prices; one explanation is the increase in the formations of syndicates and partnerships that poll money from smaller investors and provide them access to stock that they would not be able to afford on their own. The benefits of partnerships are many for the individual owner. It allows them to participate in better stock, diversify their investments and reduce their monthly expenses in the upkeep of each horse. These syndicates have attracted a whole new breed of owners who would not otherwise participate in the sport.

In addition, Arbitrageurs, known in horse racing as “pinhookers” have become more active in the yearling sales. They purchase yearlings and sell them the following year in sales for two year-olds in training. At these two year-old sales buyers have the advantage of seeing these very young horses run at speed for a short distance and any hint of ability can skyrocket a horse’s value into the millions of dollars. Early this year a two-year old in training sold for $16 Million Dollars at one of these sales and it is not extraordinary for some of these pinhooking operations to boast an average return of 18% or more on their websites. With returns such as these, more and more players are involved in this activity and dreams of hitting the next homerun keep them pushing the prices of yearlings up.

Other reasons are more extrinsic to the sales: the high price of oil, the strength of the markets, the weak dollar that attracts international buyers etc., but few of these reasons, if any, have to do with the earning potential of the racehorses themselves. The realities of the sport are that purses at tracks are stagnant and on-track attendance is at an all time low. With the exception of a few regional programs that are successful and the promise of video lottery terminals at some tracks; the prospect for horses to earn back their purchase price at the track remains bleak.

The other avenue for return of investment for buyers is the value of their prospects for breeding. Prices of stallions and mares have been rising at an impressive pace. As an example, in 2002 Came Home retired with a stud fee of $40,000 as the most expensive stallion to retire that year. In 2006 Ghostzapper retired at $200,000, a fee usually reserved for the very best stallions whose progeny has proven time and time again that they can run with the very best. The value of these fees pushes the value of stallions to the stratosphere and the price of well bred yearlings has risen accordingly. But the reality is that of the thousands of yearlings that go through the ring, only a handful will be worthy enough to stand at stud.

Females have also increased in value in the past few years dramatically. A great number of fillies purchased at this sale retire after racing to continue their careers in the breeding shed. Their prices, as well as the prices for Stallions, rise and fall in relation with the prices of yearlings. When the yearling markets are hot, breeders are able to pay more for breeding stock and stud fees and their prices rise accordingly. It is a cycle that artificially creates high prices in every sector and creates the problem that when one of these sectors suffers, they all follow suit.

Thoroughbreds are a high-risk game that can offer high rewards, both financially and emotionally, but the game is becoming more and more expensive to play and there is no apparent good economic rational to explain this. But as the Keeneland sale opens its doors, the world will hold its breath and open its pocket books wider than ever in search of the next Derby horse regardless of the price.

Thursday, August 31, 2006

Bluegrass Cat

Bluegrass Cat is yet another top 3-year-old that has been retired prematurely from the track; this time due to an injury to his hind pastern. The injury came at a very bad time for Bluegrass Cat, he had just exhibited what Todd Pletcher described as a “break-through performance” in the Haskell and he seemed to be maturing well and getting better with each start. At that pace Bluegrass Cat could well have become one of the important players next year in the misnamed ‘handicap’ division.

But WinStar Farm, the owner of Bluegrass Cat, had no intention of ever racing him next year. Readers of the Bloodhorse already were seeing the clues after the Haskell. At first it came as a stylized claw with blue outlines in a white background and nothing more. As the issues kept coming, the advertising campaign became clearer showing pictures inside the claw of Bluegrass Cat winning the Haskell. I, like many others, was scratching my head trying to figure out if Bluegrass Cat had been retired before the Travers and I had somehow missed the announcement. After all, it is not standard practice, nor logic, to spend so much advertising money in a teaser campaign if the horse’s retirement is not immanent.

It is obvious to all that the horse was not yet as good as Bernardini and for that matter Invasor, Lava Man or Sun King. So it is not likely that he would have caused a huge impact in the Breeders Cup. He also seemed to be out of the running for top 3 year-old honors. But the injury to Blugrass Cat, as tragic as it is for the horse and for racing fans, could not have come at a better time for WinStar. Bluegrass Cat had just had a runaway performance in the Haskell and now all involved are hinting that he may have done better in the Travers had the injury not occurred. “I guess we will never know how close he was to Bernardini” will no doubt be the sales pitch.

But we can hardly blame WinStar for wanting to cash in on their investment as soon as possible. After all they have one of the top stallion prospects of next year on their hands; A hot 3 year-old who is a son of Storm Cat! It is always unfortunate to lose such a talented individual for racing but I am certainly looking forward to the next stage of his career.

Wednesday, August 30, 2006


(As appeared in the Letters to the Editor section of the Bloodhorse July 22, 2006)
Once again the California Horse Racing Board got it wrong and completely missed the point when stewards ruled in favor of Intercontinental by stating that furosemide was “a legal pre-race day medication” and that there was “no evidence that proved that the late administration of the authorized medication provided an edge to Intercontinental”.

Have they completely forgotten what happened on that day? That day a veterinarian lied about the time she administered the shot of Salix and falsified reports that stated the times at which the shot was administered. The connections of Intercontinental knew or should have known at what time the shot was administered and it should have been their obligation to report the situation immediately to the stewards; but they did nothing! Hoping, no doubt, that no one would notice. It was only because security was able to video tape the time of administration that this all came to light.

The rules state that Salix must be administered at least four hours before the time of the race. The penalty for breaching the rule is that a horse must be scratched from the race - a very severe result. This rule was put in place no doubt to protect the integrity of racing, the health of the horses and to assure that no one obtains an unfair advantage. This rule was clearly violated when the Salix shot was administered to Intercontinental 20 minutes too late. The stewards would now have us believe that this rule is immaterial and that no unfair advantage was obtained. Are they really saying that their rules are meaningless?

No penalty was incurred by the connections of Intercontinental and only a $750 fine was imposed on the lying vet.

The shortsightedness of the steward’s decision completely missed the point. It is not the unfair advantage obtained in the race that must be punished; it is not even the breach of the rule that is the big issue. It is the cover-up by the connections of Intercontinental and the lying by the veterinarian that must be dealt with severely with an exemplary punishment that will deter future lies, falsifications and wrongdoings.

What the stewards are screaming with their decision is that it is better to lie that to tell the truth, that it is better to falsify a report that to admit that a mistake was made, that it is better to remain quiet than to come forward. The punishment should have been such that when this situation arises again everyone involved will have a big incentive to come forward and inform the stewards of the problem so that it can be dealt with before the race, before the betting public is affected. What they have done is to make it clear to everyone that they should keep hiding, that they should keep lying. After all what is the cost of lying if one is found out? The answer is $750. The benefits? A win in a Grade II race.