Avoiding the Cost of Interest

“Not interested” have seemingly become Brian Cashman’s favorite two words, which hasn’t exactly been music to the ears of many Yankees fans (or agents hoping to ignite a bidding war). Although it’s easy to see why Cashman would remain aloof when it comes to big ticket free agents or inflated trade demands seeking the team’s best prospects, the cold shoulder given to pitchers like Hiroki Kuroda and Roy Oswalt has been harder for many to understand.

Is Roy Oswalt the best option for the Yankees? (Photo: AP)

As the winter has progressed, and the Yankees’ Hot Stove has remained without a flame, there has been a growing disenchantment among the fan base. All of sudden, the likes of Oswalt and Kuroda have become “must haves”, and the Yankees’ lack of interest a sign of irrational fiscal restraint. Earlier, I suggested the team might be in a warped version of a rebuilding mode, and apparently, many in the Yankees’ Universe have taken that sentiment a little too much to heart.

Whether or not the Yankees are laying the foundation for when Cole Hamels becomes a free agent next season, there is no reason for the team to make a rash decision on players whom, only weeks ago, most would have agreed weren’t a great fit. After all, is a 34-year old Oswalt, who is coming off a season with a bad back, really what the Yankees need? Is a 37-year old Kuroda, who has spent his brief career in the NL West, any better?

As constituted, the Yankees’ rotation has several question marks, but the only real candidate to be removed for an acquisition would be Phil Hughes. Considering his struggles over the last season and a half, many fans would likely welcome a veteran replacement, but should the Yankees be willing to pull the plug on a pitcher who was not only a highly touted prospect, but has had some success in the major leagues? Granted, penciling Hughes into the rotation represents a risk, but the potential reward (a young, reliable starter under team control for three more years) suggests it should be one the Yankees are willing to take, especially when contrasted against what could be expected from some of the proposed alternatives.

Read Full Post »

Filling Out the Yankees’ Trade Wish List: The Right Handers

As the baseball Hot Stove slowly builds from early embers, the Captain’s Blog will be busy identifying the top pitching targets that the Yankees should consider pursuing in a trade. In part one, a game plan to acquire Felix Hernandez was devised. Admittedly, such an acquisition probably falls under the heading of wishful thinking, so just in case that advice proves unsuccessful, one of two backup plans is now suggested (for a link to the other, click here).

Assuming the Mariners refuse to trade Felix Hernandez at any price, and the cost proves too prohibitive for the likes of Gio Gonzalez and John Danks, there are still several attractive options to consider. In particular, a trio of talented young right handers could all be made available by their respective teams, and Brian Cashman should be first line to kick the tires on each one.

Top-10 Right Handed Starters, Ranked by WAR: 2009-2011

Player	WAR	W	L	IP	ERA	ERA+
Roy Halladay	21.2	57	26	723.1	2.53	163
Justin Verlander	18.3	61	23	715.1	3.06	140
Felix Hernandez	16.7	46	31	722	2.73	147
Jered Weaver	16.7	47	28	671	3.03	134
Tim Lincecum	14.3	44	31	654.2	2.87	138
Josh Johnson	14.1	29	12	453	2.64	159
Ubaldo Jimenez	13.7	44	33	628	3.63	126
Dan Haren	13.2	42	32	702.2	3.41	122
Matt Cain	13.1	39	30	662.2	2.97	134
Zack Greinke	12.9	42	28	621	3.33	126

Source: Baseball-reference.com

Read Full Post »

Filling Out the Yankees’ Trade Wish List: #1 Felix Hernandez

Now that CC Sabathia has opted against opting out, the starting pitchers available in the 2011 free agent class pale in comparison to the offensive players testing the market. However, there are viable options to consider, including C.J. Wilson, Roy Oswalt, Mark Buehrle, and the soon to be posted Japanese standout Yu Darvish.

Should the Yankees be pumped up about a potential free agent like Yu Darvish, or focus on the trade market instead?

Although Brian Cashman will undoubtedly give careful thought to every prominent free agent starter, more and more, it seems as if the Yankees’ primary focus will be acquiring one in a trade. This strategy makes sense for several reasons. For starters (pun intended), there are heightened risks associated with many of the more attractive free agents (age for Buerhle and Oswalt; lack of a track record for Wilson and Darvish). Because these free agents would likely require a lucrative long-term contract (or in Darvish’s case, a hefty posting fee), a cost-risk analysis might not justify the pitcher’s expected contribution. Besides, in free agency, a team is often forced to pay more for past performance than future value, which especially seems likely among this group.

Another reason why it makes sense for Brian Cashman to explore a trade is because the Yankees have depth in their minor league system, particularly at pitcher and catcher. To some, that might be all the more reason to not make a move, but the recent release of Andrew Brackman is a cautionary tale. Less than eight months ago, Brackman was being touted as one of the Yankees’ three “killer-B’s”, but now he is looking for a job. Part of the reason for that decision was the Yankees’ prospect depth made Brackman’s 40-man roster spot a valuable commodity, but the tall right hander’s rapid fall from grace says more about the unpredictability of pitching prospects.  Although the organization should not be adverse to allowing its own prospects to develop, each and every one should be on the table in the right deal.

With the rationale out of the way, the next step is to determine potential trade targets. Brian Cashman and his Yankees’ brain trust have likely already begun assembling such a list, but just in case they need some help, the Captain’s Blog will be spending the next week highlighting the top pitching trade targets whose acquisition would be worthy of a concerted effort. So, where to start?

Read Full Post »

As Deadline Approaches, Cashman Must Weigh Cost Against Risk and Potential

Now that the summer trading frenzy has gotten underway, Yankees’ fans will start beating the drum for a blockbuster of their own. The only problem is there aren’t many obvious candidates available on the market. Otherwise, history tells us that Brian Cashman would probably have pulled the trigger already.

The names most commonly tied to the Yankees in trade rumors are the Dodgers’ Hiroki Kuroda and the Rockies’ Ubaldo Jimenez. According to Buster Olney, the Yankees currently prefer the much older Kuroda because of his greater consistency. On the surface, that statement seems absurd when you consider the career bWAR of the Dodgers’ right hander is just barely higher than the number compiled by Jimenez in 2010 alone. Sure, Kuroda has been more consistent, but Jimenez has been better.

Ubaldo Jimenez vs. Hiroki Kuroda, 2008 to 2011

	Ubaldo Jimenez				Hiroki Kuroda
Year	fWAR	bWAR	AvgWAR		fWAR	bWAR	AvgWAR
2008	4.3	3.1	3.7		3.6	2.2	2.9
2009	5.7	5.1	5.4		2.2	0.2	1.2
2010	6.3	7.2	6.8		4.2	2.5	3.4
2011	2.5	1.9	2.2		1.7	2.5	2.1
Total	18.8	17.3	18.1		11.7	7.4	9.6

Note: AvgWAR = bWAR + fWAR/2
Source: baseball-reference.com and fangraphs.com

In sports, consistency is often viewed both pejoratively and euphemistically. To some, the term is used to cover up for a lack of elite production (akin to the “professional hitter” moniker), while others employ it in a demeaning manner (kind of like saying a woman has a nice personality). However, consistency has very direct meaning, and players who exhibit it have real value…provided the level of that consistent production is accurately tied to their cost.

Read Full Post »

What Price Liriano? Despite Need, Yanks Can’t Afford to Part with Blue Chips

Is Francisco Liriano the offseason pitching acquisition for which Brain Cashman, and the Yankee fan base, has been patiently waiting?

Liriano would help round out the Yankees' rotation, but do health concerns make the rumored cost prohibitive?

According to a newspaper report out of Minnesota, the Twins’ recent inability to sign their talented young lefthander to a long-term deal has led some in the organization to consider trading him while his value is high. Not surprisingly, this news immediately prompted speculation about Liriano being traded to the Yankees. Over at IIATMS, Jason provided a nice rundown of various reactions to this rumor from throughout the Yankees’ blogosphere, but as always, the devil is in the details.

The Yankees’ farm system is brimming with highly regarded prospects, but most major deals involving the pinstripes always seem to center around two: Jesus Montero and Manny Banuelos. At this point, Montero, who some have compared to Frank Thomas and Mike Piazza, seems close to untouchable, but there has been no such indication regarding Banuelos. Although the TINSTAAPP (there is no such thing as a pitching prospect) concept is very popular in some circles, Banuelos’ scouting report suggests that he may be the exception that proves the rule. If the Yankees’ internal evaluations are as optimistic, trading this young lefty would seem to require an extreme level of prudence.

When healthy, Liriano has proven to be a terrific pitcher who excels at missing bats, which is usually a pre-requisite for dominance. However, the “when healthy” caveat can not be taken lightly. Although all pitchers are a risk, ones who have already exhibited a history of arm problems and undergone a Tommy John surgery carry with them an extra bright red flag.

The risk associated with Liriano’s injury history is further compounded by his impending free agency after the 2012 season. As a result, any team acquiring him would have two options: (1) sign Liriano to a long-term deal just one strong season removed from his recovery; or (2) wait until after 2012 and run the risk of having to give him a Cliff-Lee type contract. Even though money isn’t as much of a concern to the Yankees, sinking a pretty penny into an injury prone pitcher would probably make even the Steinbrenners swallow hard.

Read Full Post »

When Johnny Comes Marching Home Again?

The Yankees and Johnny Damon have reportedly discussed a return to the Bronx, but concerns over a lack of playing time have made the possible reunion unlikely.

Is Johnny Damon returning to the Bronx?

Although the Yankees are set in the outfield, the team’s bench has been severely depleted this offseason. Lance Berkman and Austin Kearns have already signed elsewhere, and Marcus Thames seems destined to the do the same. As a result, the Yankees have no depth, literally.

Not only do the Yankees lack a viable fourth outfielder, but they also do not have a capable bat to backup Jorge Posada in the DH role. Last season, Posada and the Yankees outfield trio of Brett Gardner, Curtis Granderson and Nick Swisher missed a collective 92 games. If that is repeated in 2011 (or if Posada is forced to go back behind the plate), the team will not only need to acquire another pitcher during the season, but another hitter as well.

Damon isn’t a perfect fit. His defense is below average and he swings from the left side (although he has developed into an above average hitter against southpaws). The ideal acquisition would be a right handed bat capable of playing plus outfield defense, but no such candidate remains on the market. Vladimir Guerrero swings from the right side, but he really shouldn’t even keep a glove in his locker anymore. In other words, Damon, although an imperfect solution, is really the Yankees last chance to add quality depth via free agency.

From Damon’s perspective, the idea of relinquishing an everyday role is probably hard to accept. However, it isn’t hard to figure out a scenario in which he would play 100 games. Still, that may not be enough for a player used to being in the lineup every game. Ultimately, Damon’s decision may be determined by which teams can offer him a starting position. If a competitive team like the Rays is able to promise him extensive playing time, his choice would be easy. If he is only able to find playing time on an uncompetitive team, however, Damon may eventually decide that a more limited role in a place that he enjoys is the better option.

As has been the case all offseason, the Yankees will need to exercise patience as Damon sorts through his options, but if a reunion is in the offing, the signing would be a rare example of moving ahead by looking back.

Read Full Post »

Farewell to Arms: Despite Being Shutout of Off Season’s Best Pitchers, Greinke Deal No Cause for Panic

(In addition to appearing at The Captain’s Blog, this post is also being syndicated at TheYankeeU.)

Everybody knew that Zack Greinke would be traded before Spring Training, but the suddenness of the deal, not to mention the destination, was somewhat of a surprise. However, despite attempts to suggest the contrary, the Yankees were not caught off guard by the transaction.

In 2009, Zack Greinke was the best pitcher in baseball, but the rest of his career has been much less dominant (Photo: SI).

As soon as Cliff Lee finally made up his mind, Greinke trade rumors became the new fuel for the hot stove. Because the Yankees and Rangers were both jilted by Lee’s decision, the natural assumption was that both would be the front runners for the Royal’s ace, but once again, a “mystery” team emerged from the pack. Not surprisingly, Greinke’s trade to Milwaukee was portrayed as another blow in the Yankees’ off season of discontent, but in reality, it was really evidence of a firm hand steering the ship.

Without a doubt, Greinke is a very talented pitcher, but some of the recent analysis of the trade seems to be based on the notion that the right hander’s real plateau is his 2009 Cy Young season, in which he had a WAR of 9.4 and ERA+ of 205, and not the more “normal seasons” that have surrounded it. That’s not to suggest Greinke isn’t a top of the rotation starter, however. In particular, WAR likes Greinke enough that his 2008 and 2010 seasons both ranked among the top-20 pitchers in all of baseball. Although ERA+ is less kind (ranked 21 in 2008 and 61 in 2010 among all qualified pitchers), Greinke’s performance before and after his Cy Young season has been strong enough to suggest continued success, especially with a move to the weaker NL Central, but that doesn’t mean he should be viewed along the lines of Lee or any other top ace in the major leagues.

On the Strength of a Historic 2009 Cy Young Season, Zack Greinke Has Ranked Among the Best Starters in the Majors Since 2008

	2008	2009	2010	Total	Rank
WAR	4.9	9.4	5.2	19.6	4
ERA+	126	205	100	133	11
xFIP	3.76	3.15	3.76	3.55	11

Note: Minimum of 450 innings.
Source: baseball-reference.com and fangraphs.com

It remains to be seen how well the Royals made out in the deal (respected evaluators like ESPN’s Keith Law and BP’s Kevin Goldstein disagree somewhat), nor is it certain that the Yankees could have offered a similar package without including higher end prospects like Jesus Montero. Regardless, it seems as if the Yankees made an informed decision that Greinke’s past health issues and overall performance, combined with the asking price, all conspired to make him a less than ideal alternative to the team’s failed pursuit of Lee. In other words, there likely wasn’t any panic in the Yankee offices when the Greinke deal was announced.

So, if Greinke wasn’t the best fit for the Yankees, who is? Even with the return of Andy Pettitte, the Yankees will still need to fill one rotation slot. Mark Buehrle seems to be an ideal candidate, but White Sox GM Kenny Williams has stated that the veteran lefty is not on the trading block. One pitcher rumored to be available is the Rays’ Matt Garza. However, even if Tampa was willing to trade within the division, the volatile right hander’s declining peripherals suggest that he wouldn’t qualify as a frontline starter, nor be worth the expected cost. In fact, he has the hallmarks of another A.J. Burnett, and the Yankees likely have their fill of pitchers with that profile.

Considering the lack of attractive options, the Yankees may well decide to entrust the role to rookie Ivan Nova and then bide their time for a midseason acquisition. Patience has been the off season-long theme for the Yankees, and the Royal’s trade of Greinke shouldn’t trigger a change of course. It might be hard as a fan to accept, but as long as Brian Cashman practices what he preaches, the 2011 season remains in good hands, even if the Yankees seem to be lacking the necessary arms.

Read Full Post »

Cashman Plays Fiddle, but Bronx Isn’t Burning; With Door Slammed on Big Names, Low Key Moves May Be Best Alternative

In the wake of losing out on Cliff Lee, Brian Cashman has preached patience, but can the Yankees afford to wait on filling the team’s most pressing needs?

As things stand, the Yankees need to fill the following holes: at least one above average starting pitcher, a competent relief pitcher (preferably a lefty if Damaso Marte’s prognosis has not improved), and a right handed bat with some defensive utility.

According to a report from John Heyman, the first, and most important of those needs, is likely to be met by the return of Andy Pettitte. If the veteran lefty does eventually decide to come back, the Yankees will essentially be returning a 95-win team that was one game removed from the best record in baseball. However, the roster has suffered to two key subtractions, each directly feeding into the other two main deficiencies on the team.

Kerry Wood had a 0.69 ERA in 26 innings with the Yankees.

With Marcus Thames likely ticketed to Japan and Kerry Wood packing his bags for Chicago after signing what seemed to be a steeply discounted deal with the Cubs, the Yankees find themselves in the market for their replacements. Unfortunately, two seemingly ideal targets, Bobby Jenks and Josh Willingham, both came off the board yesterday, which leads us back to original question about whether being too patient is a bad thing?

Considering the contracts signed by the likes of Scott Downs, Joaquin Benoit, Matt Guerrier and Jesse Crain (all three-year deals worth at least $4 million annually), Wood’s decision to turn down a $3.5 million offer from the White Sox and take $2 million less from the Cubs was somewhat surprising (although taking less money to play in a preferred spot seems to be in vogue this offseason). The Yankees offer to Wood has not been reported, but based on the White Sox offer, it doesn’t seem as if Wood would have returned to New York for anything less than $4 million. Although many might argue that such a price would have been reasonable, it’s important to remember that Wood has averaged less than 50 innings per season since 2005. So, even though his dominant performance (0.69 ERA in 26 innings with the Yankees) at the end of the 2010 season is still fresh in many people’s minds, it shouldn’t overshadow his more relevant injury history. Also, it’s important to keep in mind that the Yankees rode Wood pretty hard down the stretch, and it’s doubtful that the fragile righty would have been able to shoulder a similar workload in 2011.

One potential replacement for Wood was rumored to be Jenks, but that went by the wayside when the Red Sox inked the former White Sox closer to a two-year deal worth $12 million. Although Moshe Mandel at TYU makes a compelling case for Jenks, it’s hard to get too optimistic about the prospects of a 30 year old reliever who has been out of shape for most of his career, even if his peripherals suggest a rebound season. At a more modest salary, Jenks may have been worth a gamble, but $12 million over two seasons is a significant outlay for middle relief. Besides, the Yankees already have a hard throwing fastball, slider, curve reliever in Joba Chamberlain, who is five years younger and will be making considerably less money. Although many Yankees fans have been down on Chamberlain because of his inconsistency, it is worth noting that Chamberlain enjoyed some of the same positive peripherals (xFIP of 3.34; K/9 of 9.67; BB/9 of 2.76) as Jenks, so any bullish case for the latter would apply to the Yankees’ enigmatic righty as well.

When in the lineup, Josh Willingham has wielded a potent right handed bat.

Marcus Thames quietly had a very productive 2010 season with the bat, posting an OPS+ of 122 in 237 plate appearances. Thames wasn’t a viable option in the field, however, which mitigated his overall value, so his departure isn’t really a significant loss. One seemingly ideal replacement would have been Josh Willingham, but he was just traded to the Oakland Athletics. Even if the Yankees could have acquired him, however, the relative lack of playing time might not have been appealing to a player one year removed from free agency. Also, Willingham’s recent injury history also suggests that he might not be a reliable option. As evidenced by Nick Johnson last season, impressive numbers on paper can’t overcome the negative impact of inevitable injury. Willingham probably isn’t in that class yet, but the trend isn’t encouraging, so maybe the Yankees failure to obtain him will wind up being for the best.

Patience really is a virtue, particularly if you are the General Manager of the New York Yankees. Although it may seem as if this week has been one of missed opportunities, there is still plenty of time until Spring Training. On the relief side, high profile targets like Rafael Soriano and Brian Fuentes remain, but an under the radar guy like Pedro Feliciano could turn out to be the best fit. Meanwhile, the solution to the team’s need for a righty bat might be someone like Bill Hall, whose versatility would also give the Yankees added flexibility.

Clearly, Brian Cashman has his work cut out for him, but there really is no need to make any rash judgments. Patience is not something normally associated with the Yankees, but considering the current circumstances, it seems to be the best course. As long as Cashman is able to fill the Yankees’ holes before the spring, the team should be well positioned for the playoffs, not to mention a major player at the trading deadline. Then, at that time, all patience can be put to the side. In the meantime, however, it will have to be in full supply.

Read Full Post »

Seven-Year Itch: A Look at Starters in Their Age 32 to 38 Seasons

(In addition to appearing at The Captain’s Blog, this post is also being syndicated at TheYankeeU.)

In an effort to evaluate whether the Yankees and Rangers are setting themselves up for a fall by offering a long-term contract to Cliff Lee, many have invoked similar deals that were given to the likes of Barry Zito, Johan Santana, C.C. Sabathia, Mike Hampton, Kevin Brown and Mike Mussina. Even if all those pitchers were similar to Lee, it would still be foolish to draw any meaningful conclusion from such a small sample size.

There really is no point in comparing Lee to other pitchers who signed similar long-term contracts. At best it is an anecdotal pursuit. After all, the question we need to answer is whether Lee will be productive over the term of the proposed contract, and a better way to do that is by looking at every starter who pitched from 32 to 38 (the ages Lee would be under a seven-year contract).

Relative Performance of Starters, Ages 32 to 38, Since 1901

	Total	ERA+ >= 100	ERA+ >= 120
Lefties	37	32	15
Righties	80	65	19

Note: Includes all pitchers who threw at least 1,000 innings between the ages of 32 and 38 and started at least 75% of their games.
Source: Baseball-reference.com

Since 1901, 397 starters (75%-plus of all games in the rotation) pitched between the ages of 32 and 38. Of that total, 117, or 29%, pitched at least 1,000 innings, of which 83% had an ERA+ of 100 or higher and 29% had an ERA+ of at least 120. Among lefties, the percentage of starters with an ERA+ of 120 or better jumps to 41%.

Based on the data above, it seems that if a starting pitcher is able to stay healthy, he’ll likely be at least league average during his age 32 to 38 seasons. And, if he is a lefty, there is close to an even chance that he’ll be well above average. Looked at in this light, the key question regarding Cliff Lee is whether he will stay healthy over the length of a seven-year deal. Although he has suffered from minor abdominal and back issues during his career, Lee has managed to pitch at least 200 innings in five of the last six seasons (in 2007, he was sent to the minor leagues). The ace lefty also has a reputation for being in good condition and a tireless worker, so there is no reason to think complacency or a premature break down will develop. In other words, Lee fits the profile of a pitcher who should continue to log innings as he progresses deeper into his career. And, once you come to that conclusion, it becomes much more likely that he’ll justify a six- or seven-year contract.

Listed below for further comparison are the top-20 left handed pitchers who meet the criteria referenced above. After his soon-to-be new contract expires, will Lee’s name be added to this list? That remains to be seen, but soon we’ll know whether its the Yankees or Rangers that are sure going to hope so.

Top-20 Left Handed Starters, Ages 32-38, Since 1901

Player	From	To	IP	Age	GS	ERA+
Randy Johnson	1996	2002	1548.2	32-38	210	176
Lefty Grove	1932	1938	1628.1	32-38	183	149
Harry Brecheen	1947	1953	1191	32-38	157	131
Steve Carlton	1977	1983	1854.2	32-38	242	130
Warren Spahn	1953	1959	1929	32-38	240	127
Whitey Ford	1959	1965	1695.2	32-38	243	125
Carl Hubbell	1935	1941	1579.2	32-38	191	125
Thornton Lee	1939	1945	1308	32-38	159	125
Tom Glavine	1998	2004	1544	32-38	239	124
Al Leiter	1998	2004	1360	32-38	213	124
Preacher Roe	1948	1954	1277.1	32-38	173	124
Eppa Rixey	1923	1929	1779.2	32-38	221	123
Eddie Plank	1908	1914	1704.2	32-38	205	123
Tommy John	1976	1981	1322.1	33-38	184	123
Eddie Lopat	1950	1955	1104.1	32-37	148	121
Jamie Moyer	1995	2001	1291	32-38	194	115
Andy Pettitte	2004	2010	1262.2	32-38	203	115
Mike Cuellar	1969	1975	1921.1	32-38	264	114
Chuck Finley	1995	2001	1373.1	32-38	215	114
David Wells	1995	2001	1421.2	32-38	210	113

Note: Includes all left handed pitchers who threw at least 1,000 innings between the ages of 32 and 38 and started at least 75% of their games.
Source: Baseball-reference.com

Read Full Post »

Six Years or Seven? An Apples-to-Apples Look at the Cliff Lee Sweepstakes

The Cliff Lee sweepstakes has turned into a guessing game over which mystery teams have supposedly offered the ace lefthander a seven-year contract. Although no confirmations have been forthcoming, the addition of a seventh year seems to be a major sticking point, at least for the Yankees, who, again according to unsubstantiated rumors, are unwilling to go beyond six.

On his Twitter account, columnist John Heyman reported that although the Yankees intend on sticking to six years, they would try to “steal” Lee with an inflated offer of $140-150 million. Aside from the fact that a thief isn’t supposed to come away lighter in the pockets, the biggest problem with Heyman’s exclusive is the Yankees’ supposed logic doesn’t really make much economic sense (or cents, for that matter).

All long-term contracts carry heightened risk because of the increased uncertainty that comes from peering too far into the future. For many, the burden of carrying a star player past his prime at an inflated salary seems like a fate worse than being a fan of the Pittsburgh Pirates. However, we can sometimes get too carried away with the length of a contract, especially when what we should be focusing upon is the overall value.

Back loading a contract is one way teams seek to defray the exorbitant cost of long-term deals. Even though that goes completely against the misplaced logic summarized above (now, the star player is paid even more as he gets further from his prime), the economic reasoning is very sound. Why? Because money has time value. In other words, $1 in the present is not the same as $1 in the future ($1 in the present is usually worth more). Factors such as inflation, interest and tax rates can all have an impact on the value of money as time passes, which, brings us back to the Yankees’ reported aversion to giving Lee a seven-year deal.

Let’s assume that Heyman is correct and the Yankees are willing to pay Lee $150 million over the next six years. Instead of dismissing the notion of a seven-year deal out of hand, our next question should be at what terms would such a contract be equivalent? One way to determine that is to consider the present value of two different contracts and see how they compare.

Present Value Comparison of Two Contracts

	Deal 1: $150mn / 6 years			Deal 2: $164.5mn / 7 years
Year	Salary	Present Value		Salary	Present Value
1	$25,000,000	$25,000,000		23,500,000	$23,500,000
2	$25,000,000	$22,186,231		23,500,000	$20,855,057
3	$25,000,000	$19,689,153		23,500,000	$18,507,804
4	$25,000,000	$17,473,124		23,500,000	$16,424,736
5	$25,000,000	$15,506,510		23,500,000	$14,576,120
6	$25,000,000	$13,761,240		23,500,000	$12,935,566
7	NA	NA		23,500,000	$11,479,658
Total	$150,000,000	$113,616,258		$164,500,000	$118,278,941

Note: Based on a nominal interest rate of 12% compounded monthly. Assumes salary paid in full each year (which favors shorter-term deal).

Source: zenwealth.com

At this point, it might be worthwhile to take a quick diversion and explain what present value means. Basically, in this instance, it refers to the amount of money the Yankees need today to pay off a debt tomorrow (think about Wimpy and hamburgers). Of course, the concept assumes that the money is invested wisely, not spent frivolously (think Carl Pavano). With that in mind, let’s assume the Yankees invested $22,186, 231 on day one of the rumored contract and received a 12% annual rate compounded monthly. At the end of the year, the Yankees initial investment would amount to $25,000,000 (principal plus interest of just over $2.8 million). As a result, with a discounted initial sum, the Yankees could pay Cliff Lee’s salary in the following season.

Now, let’s fast forward back to the comparison. Although it does look as if the Yankees’ shorter deal is less expensive, we aren’t finished yet. In addition to calculating the present value of each term year, we also need to consider the opportunity value of the $1.5 million “saved” under the longer contract. Once again, assuming that the Yankees invested the saving (125,000 per month) at an annual rate of 12%, they would end up with just over $4 million in return. When subtracted from the present value of the deal, the two terms presented in the chart above become near equivalent. For the Yankees, however, there is also the issue of luxury tax. Assuming the team’s payroll would hover around the same level regardless of either deal, it would enjoy a luxury tax savings of $3.6 million (or more, if the Yankees also invested that sum) over the first six years of the seven-year deal. When these factors are also considered, the seven-year deal comes in almost $3 million cheaper than the shorter version.

Normalization of Hypothetical Seven-Year Deal

Variables	Total
Present Value	$118,278,941
Interest on Lower AAS*	$4,088,741
Luxury Tax Savings#	$3,600,000
Final Cost	$110,590,200

^* Based on a nominal interest rate of 12% compounded monthly
^# Based on luxury tax rate of 40% charged in years one to six of the contract.

At this point, it should be noted that there are more variables that need to be considered in order to increase the accuracy of the comparison. For starters, we’d need to determine the rate of return that the Yankees expect on their investments (it could be much more or less than 12%). Also, we’d need to have a better understanding of the team’s cash flow (i.e., does paying Lee compromise their liquidity to the point that they can not invest elsewhere). There is also the issue of taxes, which could mitigate the Yankees’ return on investment (although, considering the amount of debt held by the team as well as the favorable tax treatment it enjoys under the terms of its financing, that really might not be much of an issue), as well as inflation, which in a baseball sense would refer to the future direction of salaries (i.e., how much will star pitchers be paid 6-7 years from now). Having noted these caveats, the analysis still illustrates there are very sophisticated ways to evaluate long-term contracts that go well beyond how much an aged All Star is making during the final years of his deal.

Should the Yankees go to seven years with Lee? Or should six be the limit? It doesn’t really matter. What the Yankees need to do is decide upon a limit in terms of present day dollars, not contract years. Only after factoring in all the variables, can such a limit be determined. Then again, there probably is one other variable that also needs to be considered….the competitiveness of Hal Steinbrenner. We know how it would have factored into a negotiation with his father, but it remains to be seen how it will influence the son.

Read Full Post »