YEARLING PRICE DETERMINANTS

What information do buyers look to most, at least implicitly, in deciding whether to purchase yearlings at all and how much to pay?   The health of the overall national economy and personal finances are obvious answers, but data particular to the horse racing industry from the past decade provide more specific insights.

Between 2004 and 2013, average yearling prices in the United States, in inflation-adjusted terms, declined by 7.1%, whereas median prices soared by 41.3%.  Though prices were buoyed to some extent by smaller annual foal crops, the results are still surprisingly robust in a 10-year period in which there was a global financial crisis, a deep recession with high unemployment, intensified casino competition, and precipitous declines in both inflation-adjusted pari-mutuel wagering and aggregate purses.

While average yearling prices have tracked the downward path of pari-mutuel wagering and aggregate purses, median prices have trended in the opposite direction.   Median yearling prices have moved in concert with average purses, which grew in real terms by nearly 4% between 2004 and 2013.

The maintenance and growth of average purses has been made possible by a significant reduction in the number of races carded (almost 20% fewer races were held in 2013 than in 2004) and slots subsidies in casino states.  These are uncertain underpinnings for average purses, and, by extension, yearling prices.  Boosting average purse levels by cutting the number of races eventually becomes a self-liquidating tactic; and slots revenues are subject to the will of elected officials, who can give and take away.

The least risky catalyst for yearling prices is continually improving average purse levels via a turnaround in pari-mutuel wagering.

Copyright ©2014 Blood-Horse Publications.  Used with permission.

ANALYZING THE FOAL-CROP TREND

In the past decade, U. S. pari-mutuel wagering, when adjusted for inflation, declined by 41.6%, while aggregate purses decreased by 16.3% and average purses increased by nearly 4%.  Concurrently, the U. S. registered foal crop fell from 34,800 to 21,275, or by 38.9%.

The trajectory of pari-mutuel handle (which is to some extent dependent on what is occurring in the national economy) and the trend in the size of the foal crop are almost perfectly correlated.   Likewise, the correlation between the movements in aggregate purses and the foal crop is extremely high.

While correlation is not a definitive measure of cause and effect, it is reasonable to construe that breeders have generally been quick to react to unfavorable developments in pari-mutuel wagering and aggregate purses by breeding fewer mares.

After the financial crisis of 2008, yearling auction prices decreased in 2009 and 2010 but rebounded in a big way in 2011.  Since 2008, average prices are up (even in inflation-adjusted terms) 8.6% and medin prices are up 70%.  Yet the foal crop remains low.  If breeders were making decisions based on auction prices why weren’t more mares bred since 2011?  Something else is at work in declining foal crops, and the numbers indicate it may be ebbing pari-mutuel handle (in nominal and real dollars) and aggregate purses (in real dollars).

In comparison, there is no correlation between the upward movement in average purses and the downward trend in foal crops.  One reason is that average purses have been maintained and increased by spreading aggregate purses over far fewer races; in 2013, U. S. racetracks held 43,139 races compared to 53,595 in 2004.  Another cause is that purses have been supported by slots revenues.

The scale of the U. S. breeding industry should continue to shadow what is occurring with pari-mutuel wagering and aggregate purses, and the latter derives from both betting handle and slots subsidies.  Thus the magnitude of the U. S. horse racing industry ultimately hinges on actions by racetracks to rejuvenate pari-mutuel handle and with state governments to continue with slots contributions to purses.

Diminished foal crops will require racetracks to offer cards with fewer races in order to present the fuller fields that bettors prefer.  This less-is-more approach is apt to foster additional wagering.  Smaller foal crops have other redeeming qualities, such as fewer retired racehorses to place in caring homes.

Copyright © 2014 Blood-Horse Publications.  Used with permission.

INSIDER TRADING ON WALL STREET AND AT YOUR LOCAL RACETRACK

The front page of today’s Wall Street Journal reads:  “Ex-SAC Trader Gets 9 Years as Insider Sentences Toughen,” referring to the prison time given to the former fund manager of now-defunct SAC Capital.  This is the latest in a series of high-profile federal convictions for insider trading, including eight at SAC.

If the feds were to ban and prosecute insider trading in horse racing, as they have for trading stocks, there would not be enough federal investigators and courts to make a dent in the practice.  Rampant insider trading in horse racing has been around since the first race was run and is a given.

A couple of years ago, I was visiting a stable at Palm Meadows training center in southeast Florida watching some early morning workouts.  An assistant trainer told me that a 2-year-old he sent out for a breeze would be in an upcoming maiden race at Gulfstream Park and had a great shot to win as a first-time starter.  He was right and I cashed a bet.

This was certainly an exception.  Most of the supposed inside tips I have received over many years have been losers.  Trainers and jockeys generally see their chances through rose-colored glasses, though there are certainly exceptions.   Then there is the prevalent tip based on, say, what the trainer’s cousin told his next door neighbor.

This is not to say that inside information cannot be useful because it can be.  But distinguishing good tips from wishful thinking and gossip is the hard part.  Sometimes, when following the betting action in maiden races with lots of first-time starters, the odds correctly reflect the horses with the best chances based on promising workouts…that backstretch folks spread the word about.  For the most part, however, most tips are to be taken with a strong dose of suspicion.  Why, in the first place, would someone in the know want to share valuable insights and drive down the odds?  Why would trainer D. Wayne Lukas, for example, have told many people to place a large wager on his longshot Charismatic in the 1999 Kentucky Derby, like he did to the tune of a reported $2,000 bet to win?

In order for someone to be convicted of insider trading, it normally has to be shown that one or more of the insiders profited monetarily.  That would be difficult to show in the vast majority of the tips proffered on horses.

Whether it pertains to stocks or horse racing, insider trading goes on and always will.  If an insider gets caught in stock trading, the penalty might be jail.  In horse racing, even the worst tout going can always find a willing listener, and the feds don’t care even if the information leads to a winning bet.

Touts are some of the colorful characters that make horse racing so interesting.

Copyright © 2014 Horse Racing Business