Dollars were flowing at the 2011 Keeneland September Yearling Sale like champagne on New Year’s Eve in the heyday of Guy Lombardo at the Waldorf Astoria. This spending extravaganza came despite a litany of bad news from elsewhere.

The world is being roiled by fears about a credit default by Greece and the worsening debt situation in Ireland, Italy, Portugal, and other countries that use the Euro as a currency. Adding fuel to the fire, the China economy is slowing and there are growing concerns about a double-dip recession in the United States and Europe. As a result of all the tumult, securities markets around the globe have been erratic. Last week saw the worst losses in the Dow-Jones Industrial Average in three years—off 6.41 percent for the week—and Hong Kong’s Hang Seng also suffered the biggest loss since 2008—9.2 percent.

Meanwhile, down in the bluegrass of Kentucky, there was a seemingly parallel universe with a distinctly separate reality. Day-after-day, the Keeneland sale was turning in a stellar performance, while day-after-day the world’s stock markets were mostly destroying wealth.

In Lexington, it was as though the macroeconomic environment and the negative spiral in North American pari-mutuel handle do not matter to bloodstock prices. The report that U. S. pari-mutuel handle plunged by 12 percent in August evidently did not have any effect. The Keeneland sale concluded with double-digit increases over 2010: gross revenues, +12 percent; average price +18 percent, and median price +20 percent.

Why did the 2011 Keeneland sale do so well in the midst of the most uncertain economic environment since Lehman Brother filed for bankruptcy in mid-September 2008? Was the Keeneland auction an “ostrich event” in which buyers figuratively put their heads in the sand, merrily spending as though business conditions are hunky-dory?

One can only hypothesize about the reasons why the Keeneland sale was so contrarian.

The explanation that sale prices were run up by optimistic foreign buyers doesn’t have the ring of truth because economic conditions are dicey everywhere.

The view here is that the elevated prices for the premier yearlings are largely attributable to the characteristic of horse racing that it is more sport than business at the upper-most price points. Deep-pocketed buyers are so wealthy that they are not much affected by stock-market declines and tepid business conditions. What’s more, the desire to see a yearling develop into a prestigious Grade I or Group I winner often trumps economic considerations.

However, the healthy performance metrics at the middle and lower ends of the sale—for the less fashionable yearlings–defy such an easy answer. Buyers at these more moderate price points typically tend to be circumspect because they are constrained by budgets. Such “value investors” must weigh the economic rationale for a yearling purchase.

Candidly, I can’t explain with a modicum of confidence why the middle and bottom segments of the sale were bullish—given that pari-mutuel handle is so depressed. My best guess is that strong demand from racing partnerships and pinhookers was the main reason. These buyers by necessity left the big spenders to vie for the ostensibly most desirable yearlings and then drove up prices for the best of what was left.

Another possibility is that some buyers were anticipating racino-enriched purses at Aqueduct.

Lastly, a rapid increase in asset prices that does not appear to be justified by underlying economic fundamentals always raises the possibility of a bubble. For example, the latest reincarnation of the famous Dutch Tulipmania craze–circa 1630s, the archetype of all bubbles–was the run-up in U. S. housing prices followed by a glut of unsold homes that are worth less than their mortgage loan amounts.

What transpired in Keeneland’s sales ring is a welcome relief for a hard-hit horse racing enterprise, but the continuing decline in pari-mutuel wagering looms large.  At some unknowable point, bloodstock prices should correspond more closely to trends in pari-mutuel  handle.

Copyright © 2011 Horse Racing Business


  1. Jim culpepper says

    The poor in the USA are wealthy compared to everything else in history. Anyone who can drop $30,000 is wealthy in a world where 70% live on $2.00 per day. One it became apparent that society had not yet imploded, it was back to business. My friend Steve points out that this is the first time in history when poor folks are fat and the rich are skinny.