$200 Million Juvenile Market Requires Head for Heights

Bloodstock professionals have to accept an inherent, historic vulnerability of all markets. Capitalism is predicated on growth; but growth cannot be perennial. (If you find an exception to this rule, let me know. But it won't have four legs.) In order to renew a cycle of growth, from time to time you have to endure a lapse in values. Until that point, however, it is hard to resist the illusion that the momentum will never let up.

On the face of it, the bull run has certainly been sustained by the juvenile market this year. In fact, turnover at the principal North American 2-year-old sales, aggregated in the accompanying table, achieved a historic breakthrough in passing $200 million for the first time.

Moreover the purity of an 8.5 percent gain on the equivalent auctions in 2018 can be measured by a freakish consistency in the volume of business. After withdrawals, virtually commensurate catalogues of 3,924 hips (3,909 last year) were reduced to 2,740 animals into the ring, just one fewer than in 2018. With the clearance rate also virtually identical, at 77 percent and change, 2,121 animals changed hands at an average just under $96,000.

An exceptionally valid statistical jump, then, on the $88,510 average achieved last year. (Also working out, naturally, at an 8.5 percent rise.) While the average is actually restored only to a level just shy of the record set in 2017, the underlying curve continues to climb steeply.

This reflects two combined energies, one generic and one specific: a surge in the overall value of bloodstock, during the quantitative easing era; and trust in the maturity of this particular sector as a source of high-class runners.

Pinhookers have committed profitably to quality over quantity in recent years, albeit partly reflecting the decline in crop sizes since the financial crisis of 2008. In 2007, over 4,000 2-year-olds were catalogued for sale; over the past decade, even 3,000 has only been topped once. That narrower base has proved solid. The R.N.A. ratio, around one-in-three in 2007, has been one-in-four or better through the last five years. And while it took until 2013 to overtake the 2007 average (and 2015 to surpass the record turnover set that year), an ongoing boom since 2014 has elevated the average by 28.9 percent.

But that's not all gravy, by any means. This record 2-year-old market was required in order to retain anything like the same margins out of a giddy yearling market. That 8.5 percent gain in the average 2-year-old transaction is all very well. But the pinhooker, with overheads also going up, must pay nearly 30 percent more for the average yearling than was the case two years ago.
It is not just the stakes that have been raised. So, too, have temperatures in the debate over the degree to which consignors feel obliged to satisfy a market obsession with “bullet” times.
It's a hard area on which to get any kind of statistical handle. The small sample below is taken from three premier sales–O.B.S. March and April, and Fasig-Tipton's boutique auction at Gulfstream–over the past three years but is offered only on the most tentative basis. Qualification for “bullet” status is highly subjective, and varies according to track and other prevailing conditions. However ludicrous a difference can be made by a fifth of a second, to the value of a horse, then it could certainly be matched in these definitions.

With that caveat, then, you can take or leave the inferences available from the “fact” that the ratio of top lots ($500,000 or more) to have emerged from the top rungs of the timing ladder was 24 percent in 2017, and 37 percent this year. The identified “bullets” to make $500,000 or more, however, remained pretty stable (basically one-in-three) and at least implies some attention to other criteria.

As a rule, certainly, a 9:4/5 breeze by the son of a regional sire is not going to get him past a Tapit who goes 10:1/5. But the dividends achieved by sires at the 2-year-old sales seldom feel terribly instructive. The samples tend to be small–War Front doesn't even appear on the list this year, after none of his handful into the ring sold–and too easily distorted by a game-changing sale-topper, which any top stallion might pull out of his hat from one year to the next.

This next table shows the top ten sires by average this year, excluding rookie American Pharoah who broke into the elite at No 4 but obviously had no comparable data from previous years, and their rankings in the 2-year-old sales over the previous three years; plus, in brackets, the ranking they had achieved with the same crop as yearlings the previous fall.

The sector's most productive sire this year, Curlin, showed the volatility of the sample when only 36th last year. As a rule, however, the bottom line is that the name of the sire tends to determine how much you should expect to pay for a knockout under-tack show.

These days you can set your clock by heavy hitters like Tapit and Medaglia d'Oro at any type of sale. Younger sires, equally, have tended to express broader trends in their performance. Quality Road, for instance, has elevated his yearling and 2-year-old rankings more or less in tandem. And it's not hard to see exactly when Nyquist put Uncle Mo's name in lights, winning the Breeders' Cup Juvenile and Kentucky Derby between the end of the big yearling sales and through the 2-year-old auction calendar: hence the exceptional disparity between his 2015 yearlings rank (30) and 2016 juvenile rank (six).

Perhaps the only compliment we might coherently extend is to Into Mischief, whose giddy rise has been somewhat anticipated, year-on-year, by his performance in this sector. He is the only sire of these ten (themselves, remember, only taken as a snapshot of fluctuating standings) to have surpassed his yearling rank four years running.

This market, of course, is driven by pinhookers operating in a relatively brief window-too brief, as a rule, to register emerging economic trends. To a degree, then, they are insulated from market morale; certainly relative to someone who paid a stallion fee this January, with a view to selling the resulting foal at the 2021 yearling sales.

But while pinhookers of 2-year-olds can duly ride the current wave with confidence–or as much confidence as you can ever feel, with your fortunes contingent on a 10-second piece of theatre–we have already noted that both buying and selling in a bull market means that their raw materials are costing a lot more.

The yearling vendor, in turn, will often have experienced parallel pressure in pinhooking out of an equally fierce market for weanlings. For traders, then, these headline values can be illusory. They still have to pay their wages and feed and all the rest of it out of a margin that may be largely unchanged, but leaves them exposed to more risk at a higher level of the market.

Presumably the 2019-20 cycle will remain no less of a highwire. Rewinding to where we started, everyone who starts prospecting the next crop of yearlings at Fasig-Tipton's July Sale knows that the current market can't last forever. Nor, equally, can we know when those fissures perennially identified by the bears will finally break open a slowdown in the wider economy.

For what it may be worth, a gauge of U.S. business conditions compiled by Morgan Stanley has just dipped to its lowest point since 2008; while seven-in-10 chief financial officers in a recent survey predicted a downturn by the end of 2020. Trade wars, renewed instability in the Middle East and rising debt are among the unnerving shifts in the environment. And while tax breaks for the wealthy have especially nourished the value of Thoroughbreds, the fact is that the monetary instruments used to tackle an emergency in 2008 were never put away for the next rainy day.

In the words of John F. Kennedy, the time to fix the roof is when the sun is shining. As it is, the affluent have been playing up their winnings under Trump, driving stocks up around 50 percent. The bloodstock market, however, is just as sensitive to economic pain while considerably slower to respond to stimulus.

Our final table shows cycles of recovery since a downturn in 2001. After interest rates were slashed from 6 percent, the Dow Jones index made its big rally in 2003; the overall U.S. bloodstock market followed through in 2004. The difference in response proved to be far more marked, however, after 2008.

The Dow Jones lost a third of its value that year, but retrieved 18.8 percent in 2009 and has essentially maintained the same vigour as G.D.P. ever since. Bloodstock, in contrast, shed 21.2 percent in 2008 and haemorrhaged another 32.2 percent in 2009. It was still losing ground in 2010, and only began to share the recovery with an 18.2 percent gain the following year.

Its biggest single gain, since the recession, came in 2013-and even its spectacular gains then were more or less matched by the Dow Jones, which had already mustered four years of growth. Bloodstock then remained very stable for the next three years, before renewing momentum in 2017 and 2018 even as interest rates began to creep up.

Both the delayed recovery and the consolidation before renewed growth indicate, unsurprisingly, that bloodstock rides on the back of liquidities won in primary economic activity. As a result, those who treat the young Thoroughbred as an investment vehicle must remember that they are ultimately trading in luxury goods. Such, at any rate, is how racehorses are perceived by most end users, no matter how many of us depend for a professional livelihood on the industrial process of getting these animals into their hands.

So all you pinhookers and consignors, all you breakers and breeders: remember that when the end user finally recoils, it's not just a long way down. It's a longer way back.