Archives for January 2018

THE PEGASUS WORLD CUP INVITATIONAL IS A HUGE BOOST TO RACING

Frank Stronach is an octogenarian but that fact has not diminished the entrepreneurial aptitude he demonstrated as a young man, when he went from being a poor Austrian immigrant in Canada to founding and building Magna International, a giant auto-parts manufacturer and supplier.  Much later in life, he conceived and brought to fruition the world’s richest horse race, the $16 million Pegasus World Cup Invitational.

The second annual running is at Gulfstream Park near Miami, Florida on Saturday, January 27, 2018.  Basically, Gulfstream sells twelve slots in the race, valued at $1 million each, to shareholders, who have several options.  They can start a horse they own or lease or sell their slot to another owner.  The $12 million purse money has been supplemented by The Stronach Group, bringing the total purse to $16 million (the purse in the inaugural year of 2017 was $12 million).

In conjunction with the Pegasus World Cup, Gulfstream is holding a high-stakes handicapping contest.  The buy-in is $12,000 to be bet on Friday and Saturday, with the Pegasus World Cup being a mandatory race to play.  In addition to Gulfstream, satellite facilities owned by Frank Stronach will allow bettors to participate for an extra fee of $1,000 that goes into the betting pool:  Golden Gate, Laurel Park, and Santa Anita.  Stronach Group-owned Xpressbet.com is another way bettors can join the competition.  The payout for first place in the contest is 50% of the pot (an estimated $250,000), with the second-place winner getting 14%, third place 10%, and so on.

The Pegasus World Cup instills some excitement into the racing calendar early in the year, preceding the beginning of fan interest in the major prep races for the Triple Crown.  Moreover, owners now have plenty of monetary incentive to keep top-flight horses running after the Breeders’ Cup–at least for one more race–before retiring them to stud.

Mr. Stronach’s creation has not only stirred interest among race fans, but it has given them a respite from winter as they await the annual focus on the Triple Crown races, with the promise of longer and warmer days.

Copyright © 2018 Horse Racing Business

OUTLOOK FOR U. S. YEARLING AUCTION PRICES IN 2018

The bloodstock market is multifaceted, with bloodstock sales encompassing, for example, weanlings, yearlings, broodmares, 2-year-olds in training, and horses of racing age.  The market is also divided into private sales versus auction sales.  The most closely watched indicator of the overall economic health of the bloodstock market is the average price for yearlings sold at auction…and that is the focus here.

My research found that there is a weak positive correlation between several macroeconomic variables and the level of auction prices for yearlings:

  • U. S. consumer sentiment about the state of the economy.
  • Gross Domestic product.
  • U. S. real personal income.

As for economic characteristics that pertain specifically to the Thoroughbred industry, there is also a weak positive correlation between average auction price for yearlings in a given year and…

  • the direction (as measured by year-over-year percentage change) of the previous year’s foal crop.

Average yearling auction prices are barely or not at all related to the level of:

  • Pari-Mutuel Handle.
  • Aggregate Purses.
  • Annual returns of the S & P 500.

Thus auction yearling prices are divorced from the two most important indicators of the economic well-being of the Thoroughbred industry at the retail level—pari-mutuel handle and aggregate purses.  This is like saying that the price of gasoline at the pump bears no relationship to the per-barrel price of oil.

Further, the wealth effect–as inferred from how the stock market is performing–has little or no demonstrable relevance to yearling auction prices.

This is not to say that the overall economy does not affect yearling auction prices because it does…but not normally to the extent that might be expected.  Under extreme conditions, of course, such as the world economic crisis of 2009, bloodstock prices plunge.  The bigger surprise is that stagnant pari-mutuel handle and purses appear not to faze major yearling buyers.

A disconnect between yearling prices and economic outcomes demonstrates that horse racing is much, much more about sport than it is about business, similar to other equine competitions.  For instance, in the world of show jumping, prices are paid for horses that in several lifetimes could not be earned back via winnings.  To use stock-market parlance, the price-to-earnings ratio is often incalcuable.

Some auction buyers are so wealthy that neither economic considerations nor the state of the retail pari-mutuel industry is a deterrent.  Other less wealthy buyers, and especially partnerships that spread risk, are willing to take a shot at striking it rich and/or finding a diamond in the rough; John Henry, Seattle Slew, and other bargains are their inspiration.

The economies of the developed nations should be strong in 2018 and that will provide a tailwind for bloodstock markets.  But the average auction price for yearlings this year—and any year–depends mostly on the propensity (i.e., the animal spirits) of a few deep-pocketed buyers who are able and willing to bid up the prices for a small percentage of coveted horses…and thereby raise the average price.

Copyright © 2018 Horse Racing Business

OUTLOOK FOR U. S. PARI-MUTUEL WAGERING IN 2018

At the 2017 Jockey Club Roundtable, Ben Vonwiller, a McKinsey & Company partner, made an informative presentation on the effects of race scheduling on pari-mutuel handle, wherein he stated:

“The first thing we needed to do was to build a model that predicted handle.  So we ran a multivariate regression, tested an array of features to see which was significant in explaining handle.  Our model can actually explain or predict handle pretty well.  It’s a pass grade of about 70%.  And many of the features that predict handle have been seen in other attempts, in other models–field size, purse size, track, race type.”

Whereas McKinsey’s model was developed to predict handle for individual races, I was interested in forecasting aggregate handle for an entire year.  I took the annual data for U. S. pari-mutuel handle from 2000 through 2016 and regressed it against a single variable, U. S. Gross Domestic Product, and found that GDP explained 74% of the variation in handle.  In other words, handle in any given year depends to an overwhelming extent on the state of the current overall economy, as reflected in GDP.

Thus the prospects for U. S. pari-mutuel handle on horse racing in 2018 are bullish if forecasts for the larger economy turn out to be true, which I am cautiously optimistic will be the case.  Here are some of the reasons why:

  • Virtually every economic indicator is pointing up, and this includes for both the United States and the developed economies of the world.  The Wall Street Journal reports that “Economic data are beating expectations by the most in nearly six years.”
  • The 2018 tax cuts will almost immediately put extra take-home pay in the pockets of a vast number of consumers, as the new withholding tables should be available by February 2018.
  • Consumer confidence is close to a 17-year high, as measured by the Conference Board.
  • Existing home sales are surging and there is a shortage of housing inventory.
  • Interest rates remain low and, although the Federal Reserve will raise rates, it likely won’t be enough to stifle economic growth.
  • Under the sweeping tax reform passed by Congress in December 2017, U. S. corporations are now taxed at 21%, down from a punitive 35%; the new rate places the United States about in the middle of the pack of industrial nations (but still well above Ireland’s bottom rate of 12.5%).  The incentive is there for U. S. companies to repatriate offshore money ($400 billion in one estimate), to bring facilities and jobs back to the U. S., and to forgo corporate inversions that relocate American companies to tax-friendly venues.  Already, major companies in the U. S. have announced bonuses and raises for employees and investments in infrastructure in the U. S.
  • The unemployment rate is hovering at a full-employment level–the lowest since 2001–and manufacturing is hiring.
  • Inflation appears to be contained.   Yet wage increases in metro areas with 3% unemployment are double the national average, which could boost inflation.
  • The Trump Administration has rolled back onerous regulations on businesses, and this is particularly important to jobs-creating smaller businesses.
  • Both major political parties in Congress favor infrastructure initiatives.

Naturally, the sanguine scenario for the U. S. economy could change if there is an horrendous international flare up or if the Federal Reserve must raise interest rates more than expected to combat government deficits and/or inflation.  But as of January 1, 2018, the prospects look the most promising in years for both the overall economy and, by extension, pari-mutuel wagering.

However, in order for pari-mutuel wagering to exceed the growth rate of GDP, there would need to be a major catalyst, an innovation that attracts bettors.

Copyright © 2018 Horse Racing Business

On January 11, 2018, Horse Racing Business will provide an outlook for bloodstock sales for 2018.