Archives for September 2009


Fact, as reported by the Wall Street Journal, September 21, 2009:

“With the economy still listing, numbers were down in every category during the first four days of Keeneland’s September auction.”

Fact, as reported by the Louisville, Kentucky Courier-Journal, September 21, 2009:

“During the first four days of the [Keeneland] 14-day sale–a period when the finest horse are usually auctioned–buyers spent 42.52 percent less on yearlings than last year. If the trend continues, the sale is shaping up to be the third straight September Sale to record lower gross sales, average prices, and medians than the year before. It would be the first time since 1992 that those key financial measures fell for three straight years.

Though the decline is already leading to fewer foals–which eventually may set the stage for healthier sales–industry leaders say this year’s low prices may force some breeders out of business.

‘We’re going to see farms close,’ Keeneland sales director Geoffrey Russell said of the weak thoroughbred market.”

Perspective and Context

“The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.” English economist Arthur C. Pigou

Business cycles ebb and flow as predictably as the sun rises in the morning and sets in the evening. The highs and euphoria of the boom times eventually must yield to the crushing lows of recessions and sometimes depressions.

When markets are soaring it is easy to confuse genius with the power of a bull market. David F. Swensen, the chief investment officer of Yale University, wrote two bestselling books for investors on how to make money like the Yale portfolio. Swensen averaged in excess of a 17% return for Yale for the ten-year period prior to the stock-market plunge that reached its lowest level in March of 2009. When the stock market turned from bull to bear, the Yale portfolio was ravaged and Swensen did not look so much brighter than everyone else.

Similarly, Fortune’s cover story on May 27, 2008 proclaimed that Ken Heebner is the world’s best mutual fund manager. Heebner’s funds plummeted in the recent bear market and his reputation was tarnished.

As with these investment gurus and many others hailed as great minds, when the bloodstock markets are escalating, it is easy to attribute a breeder’s outstanding success to his or her intricate knowledge of the business. The individual who sells seven-figure yearlings has a canny knack for putting together pedigrees and conformation typologies, or so the thinking goes. Like Swensen and Heebner, he or she must be the smartest guy or gal in the room.

The bubble mentality of a roaring bull market for bloodstock encourages more and more  people to join in the speculation by breeding relatively slow or unraced mares to relatively slow or unraced stallions. For awhile, the bloodstock market rallies not on economic fundamentals, such as increasing racetrack purses, but rather, it does so on crowd psychology.

As markets inevitably correct for the excesses of boom times, the savvy breeder does not look so savvy after all and the marginal players in the industry run for the exits. Pigou’s “error of optimism” dies in the crisis and the new error of pessimism “is born not an infant, but a giant.”

Opportunity, as seen by two of the eminent investors of all time:

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” John Templeton

“Be fearful when others are greedy and greedy when others are fearful.” Warren Buffett

If one reads the prevailing sentiments in the press by participants in the bloodstock market, things may never be the same again. The bloodstock market is at or  near the point of maximum pessimism and what John Templeton and Warren Buffett counseled is occurring. Look at what two prominent players had to say about the situation at the Keeneland sales, as quoted in the aforementioned Courier-Journal article:

“Despite the problems, some consignors — including [Case] Clay — said they’ve [Three Chimneys Farm] had calls during the first days from potential buyers wanting to take advantage of the reduced prices.”

Likewise, Barbara Vanlangendonck of Summerfield Sales said:  “I’ve had three and four calls just this morning alone, saying, ‘look at the market, let’s jump in,’”

These are green shoots, signs of a new beginning.

Keeneland’s Russell commented: “We knew this day was going to come. The financial crisis matched with overproduction — here we are. This is the new world.”

Mr. Russell is partly correct. The day was coming, brought on by the error of optimism and not enough people  being fearful when others were greedy. The halcyon days of an auction company selling an unraced 2-year-old in training for $16 million have led  to a severe rationalization of prices.

But Mr. Russell is incorrect about “This is a new world.” It is not a new world, but merely the same old world of the business cycle oscillating and wringing the excesses out of the market…and not just in the horse-racing business.  For example:

as reported by Reuters, September 21, 2009:

“Caterpillar Inc. said…that dealer sales of its heavy equipment fell 48 percent in August, with the sharpest declines in the U.S. blue-chip industrial’s truck and bus and industrial segments.”

A consoling thought amid all of the pain and angst in the downdraft: the greatest market recoveries have followed the deepest market declines. What we don’t know is whether the bloodstock market will rise to or exceed  its previous highs or whether a relatively permanent restructuring is in the offing, with fewer foals and lower auction prices. 

The Wall Street Journal says that “yearling sales figures are generally considered the leading indicator of the health of the sport.” On the contrary, yearling prices are more likely a lagging indicator and the severe dropoff is a delayed economic reaction to the plunge in pari-mutuel handle. 

Further, when auction prices are depressed, the end result will be a decrease in stud fees. Therefore, anyone buying a high-price yearling colt had better hope it can win stakes races because the prospect of getting a return on investment from stud fees is diminished. This has the effect of rationalizing prices, especially  for impeccably-bred yearling colts.

Copyright © 2009 Horse Racing Business


Abraham Lincoln was born two hundred years ago in what today is Hodgensville, Kentucky. With good reason, numerous observances and tributes have celebrated the life of the man who did the most to save the United States from disintegrating in the 19th century.

President Lincoln owned horses but did not race them in competition. Yet one of the famous men who worked closely with him was the father of a daughter who, with her husband, started a racing empire and whose bloodstock have prominent descendants today.

There is a direct linkage between John Milton Hay (1838-1905), one of Lincoln’s three private secretaries and main co-biographer, and Thoroughbred breeding and racing at the highest echelon. In addition, the practice of venture capital, which is responsible for so many leading companies, particularly in high technology, is an invention of a John Hay grandson and racehorse owner extraordinaire.

John Hay was born in 1838 in Salem, Indiana, and educated at Brown University. He moved to Springfield, Illinois, where in 1860 he was a volunteer in the successful presidential campaign of Abraham Lincoln. The 22-year-old Hay went to work for the newly inaugurated Lincoln and moved into a bedroom on the second floor of the White House. Hay became a sounding board, confidant, and friend to Lincoln during the turmoil of the American Civil War. Hay was a fierce defender of the president and stuck by his boss when Lincoln was criticized over the faltering war effort and ridiculed as a backwoods buffoon. Hay was with Lincoln for the Gettysburg address and was in the room when Lincoln succumbed to the gunshot wound to his head left by the Derringer of John Wilkes Booth.

Following the war, Hay married the Cleveland-Ohio, heiress Clara Louise Stone and settled in her hometown. Clara’s father, Amassa Stone, was a self-made man of enormous wealth who lived on the city’s then-renowned Euclid Avenue. In the 19th century and early 20th century, Euclid Avenue was called “Millionaire’s Row,” a tree-lined street of mansions housing some of the most influential industrialists in the United States. Its most famous resident was John D. Rockefeller, who lived only miles from where he founded Standard Oil in 1870 in what is known as “the flats.”

During his esteemed career, John Hay was Ambassador to Great Britain and Secretary of State for Presidents William McKinley and Theodore Roosevelt. Named in his honor are a high school in Cleveland, a library at his alma mater Brown University, and the Hay Adams Hotel in the nation’s capital. The Western Reserve Historical Society in Cleveland owns the Hay-McKinney house. This home was built by the widowed Clara Hay and purchased from her by steel baron Price McKinney, who was a Thoroughbred owner of note, part owner of Churchill Downs, the father of Hall of Fame jockey Rigan McKinney, and the grandfather of Lexington, Kentucky- born Olympic skier Tamara McKinney and Thoroughbred owner Kathleen Crompton.

John and Clara Hay had four children. One of them was Helen Julia Hay (1875-1944), who was raised in her parents’ Euclid Avenue residence. In 1902, Helen married Payne Whitney (1876-1927) of New York and they lived at their Greentree estate in Manhasset on Long Island. Payne Whitney’s father, William C. Whitney, co-founded Belmont Park. Helen and Payne Whitney launched the world-famous Greentree Stable, and had a farm, Greentree Stud, in Lexington, Kentucky, which became a premier breeding and racing operation that produced many classic winners in flat racing and steeplechasing. Payne Whitney was named after his uncle, Oliver Hazard Payne of Cleveland, Ohio, who was an associate of John D. Rockefeller in Standard Oil. Payne Whitney’s nephew was Cornelius Vanderbilt Whitney (1899-1992), who, like his father, Harry P. Whitney, before him raced some of the best horses of their day. C. V. Whitney’s former wife, Marylou, is still an outstanding Thoroughbred owner/breeder and stands Belmont-Stakes winner Birdstone.

The two children of Payne and Helen Hay Whitney more than ably carried on the family tradition in racing and business. John Hay “Jock” Whitney (1904-1982) owned many top-notch Thoroughbreds and was the originator of the practice of venture capital. His J. H. Whitney and Company (called Whitney and Company today) was the first venture capital company, started in 1946. Like his grandfather John Hay, he served as Ambassador to Great Britain. His sister, Joan Whitney Payson (1903-1975), was also a leading owner and breeder of Thoroughbreds. She was the co-founding owner of the New York Mets Major League Baseball franchise.

Very few families have left such long and indelible marks on politics, business, and sports as the Hay/Payne/Whitney families. Thoroughbred racing was integrally part of this history.

An interesting coincidence is that another family with Cleveland roots has some striking similarities to the Hay-Whitney story. In 1952, General Dwight D. Eisenhower was elected president of the United States and named George M. Humphrey (1890-1970) as his Treasury Secretary. Humphrey, chairman of M. A. Hanna in Cleveland, was one of the prominent Thoroughbred owners of his day and an influential voice in world business affairs. Eisenhower said about him: “When George speaks, we all listen.” Humphrey’s daughter-in-law, Louise Humphrey, and her son, G. Watts Humphrey Jr., have carried on the family tradition in business and racing. G. Watts Humphrey Jr. is a highly successful Pittsburgh businessperson, a well-known racehorse owner and breeder, with a farm in Kentucky, and is  a leader in several of the major companies and organizations in racing.

The graves of John Hay, John D. Rockefeller, Price McKinney, and George Humphrey are all in the beautiful Lake View Cemetery in Cleveland. These men, in their own way, were significant contributors to the history of the United States.

Copyright © 2009 Horse Racing Business


The September 5, 2009, Horse Racing Business (see archives) carried a stock evaluation of (“—Buy, Sell, or Hold?”). Yesterday’s edition of the Wall Street Journal had an article titled “Youbet Keeps Fingers Crossed On Online Gambling” (September 16, 2009, page B5A).

According to the Journal, Youbet has a 29.5% share of the advance deposit wagering (ADW) market in the United States and is the only standalone ADW. About 10% of the money wagered on horse racing in the United States in 2008 was done online. Moreover, Youbet produces racing footage and racing results on an exclusive basis for and

The Journal pointed out that Youbet stock has risen over 160% since the beginning of 2009, from a 52-week low of 66 cents per share. The stock closed yesterday at $2.37 per share. (Actually, the stock has risen 260%.)

My evaluation in the September 5 post on Horse Racing Business was moderately negative because of the drag of Youbet’s subsidiary United Tote on earnings. In the Journal piece, Youbet management acknowledged that they would like to sell United Tote.

The central theme of the Journal article is that a few analysts are recommending Youbet stock because of the prospects of legalized online gambling in the United States. One analyst has a projected per-share target price of $3.75. Even without online gambling, Youbet, in the view of an analyst, has strong growth potential in the United States and abroad. The thinking is that online betting on horse racing will come at the expense of “seedy” off-track betting parlors.  In contrast, another analyst cautioned that there is growing competition in the ADW business.

I remain skeptical that online gambling will be legalized anytime soon in the United States, even though bills have been introduced in both houses of Congress. In addition, Youbet will not have an easy time finding a buyer for United Tote at a decent price. In my view, however, the new management team at Youbet has the company on a better strategic path than their predecessors. With good fortune on the United Tote issue and a turnaround in the economy, Youbet would be well positioned. 

Copyright © 2009 Horse Racing Business