Mark it down. Friday, December 6, 2013. A turning point for the 2014 season and for the foreseeable future of the New York Yankees franchise. Robinson Cano is out. The Yankees best player and one of the few bright spots in an otherwise underwhelming 2013 season for the NYY will now be collecting paychecks from the Seattle Mariners. It’s interesting though, because when you lose your best player it’s supposed to be a bad thing… Right?

Not necessarily. It all comes down to opportunity cost. I first learned this term in my 8 AM Microeconomics class my sophomore year at Babson. This was a class where, if you were caught sleeping, the professor made you buy candy for the class and bring it to our next session. Luckily I never had to buy candy for the class, and I can hopefully shed some light on why Cano signing with the Mariners may in fact leave the Yankees better off.

The concept of opportunity cost is pretty simple. Everything you do comes with an opportunity cost. When I was going to college, the opportunity cost was the money I could have earned by working for 4 years instead of paying tuition. But I had to weigh the benefit of a college degree, which comes with the likelihood of higher future salary, vs. the immediate returns of working right out of high school. I chose college, and time will tell if it was worth it.

Another example. I wanted coffee this morning. My mom asked me if I wanted her to make me some, so I had a decision to make. Wait for her to make me coffee and get it for free, or stop at Dunkin Donuts on my way to the gym and pay the $3.00 for a large iced coffee black. Essentially I was pitting the opportunity cost of time (5 minutes or so) against the opportunity cost of money ($3). Do it the math and that comes to $36 an hour. $36/hr is a respectable wage that most anyone would be happy with. And it’s funny, because I’m so strapped for cash right now that any other day I would have taken the free coffee in a heartbeat. But I am flying out to Orlando for the baseball winter meetings tomorrow and I was crunched for time to get things done, so I decided to pay for coffee from Dunkies instead of taking it for free. Given my circumstances, the 5 minute opportunity cost was greater than the $3 opportunity cost, so I chose the lesser of two evils and paid for my coffee.

Take this concept and apply it to the Yankees’ Robinson Cano situation. Let’s assume that with the money being equal, Cano would have stayed with the Yankees. The Yankees had 2 options:

Option A) Match Seattle’s contract and presumably resign Cano.

The advantage: Acquire a career .309 hitter who in 2013 had 107 RBIs and 27 HRs, and who has scored 100+ runs 4 times. His Wins Above Replacement (WAR) last year was 6.0, which is very, very good (For reference, a WAR of 5 is All-Star caliber, a WAR of 8.0 is MVP territory).

The opportunity cost: $24 million, every year, for 10 years. That’s money that could be spent elsewhere on other areas of need.

Option B) Let Cano walk – Essentially the opposite

The advantage: Total savings of $240 million over the course of 10 years that could (and certainly will) be spent elsewhere.

The opportunity cost: A career .309 hitter who had  107 RBIs, 27 HRs, and has scored 100+ runs 4 times. His Wins Above Replacement (WAR) last year was 6.0, which is very, very good.

In the end, it came down to the fact that the opportunity cost for throwing all that money at Cano was way too high. As good as Cano is, the Yankees don’t think he’s worth $24 million for 10 years. And this isn’t a knock on Cano at all. The Yankees really, really liked Cano. You don’t offer someone 7 years for $175 million ($25mil/yr) unless you think they’re a franchise player. In fact, the Yankees offer was higher than the Mariners on a dollars per year basis. But the Mariners offer was so above and beyond, it basically came to a point where the Yankees were forced to say, “good luck in Seattle.” From a business sense, the Mariners offer which was 35% higher than the Yankees offer goes to show that the Mariners were working with very little leverage. Yes, the nature of free agency is such that more times than not there is going to be a “winner’s curse,” where you have to pay more than the market price to get a player to sign. However, you don’t outbid the next closest bidder by 3 years and $65 million unless you’re desperate. And the “any means necessary” approach worked for the Mariners, as they got their guy.

One thing worth mentioning is that Cashman did an excellent job of hedging his bets by signing Brian McCann and Jacoby Ellsbury before the Cano situation was settled. In doing so, he assured that if Cano signed elsewhere (which ended up happening), the Yankees would not be left scrambling. It also sent the message to Cano, Jay-Z, and his posse that the Yankees are not the Federal Reserve and don’t have unlimited funds. Yes they would offer Cano a substantial contract, but one that is still in this stratosphere.

The Yankees may have lost their best player, but this comes with great opportunity. Cashman wasted no time and Kuroda was resigned to a 1 year $16 million cotract. Yes, that’s a lot of money, but for one year and the Yankees needs in their starting rotation, it was necessary. While typing this, the Yankees also reached a deal with Carlos Beltran for 3 years $45 million. Just a few days ago the Yanks were adamantly against going to a third year for Beltran, but with Cano gone and a power shortage in the Yankee lineup, going to the third year to get Beltran to sign was a good decision.

This leaves the Yanks with 6 outfielders on the roster. There’s a lot of ways the Yanks can tinker with this, but here’s what I would like to see. Ellsbury in CF, Brett Gardner in LF, and Carlos Beltran in RF.  Soriano as the everyday DH, Ichiro as a platoon outfielder and part-time DH (especially vs righties) and pinch runner, and Vernon Wells as the designated “get the whip cream ready to pie somebody in the face” after a big walk-off hit, and the occasional late game power hitting pinch hitter off the bench.

If the Yanks are looking to make a move, the one guy with good trade value is Brett Gardner. He made $3 million last year and is up for another year of arbitration for 2014, so he will still be relatively inexpensive. He had a WAR of 3.2 last year, which is good, and in 2010 had a WAR of 6.0. And if you are wondering, yes… that is the same WAR as Robinson Cano put up in 2013. Gardner could be used as trade bait to land a second baseman (Brandon Phillips of the Reds or Daniel Murphy from the Mets are likely candidates), or to try to add a Starting Pitcher to a rotation that could certainly use the help.

The Yanks will likely explore free agent possibilities at 2^nd base and SP first, and if necessary look to deal Gardner. Omar Infante is one name out there that is a possibility at 2^nd base. My gut feeling is that eventually, Gardner gets traded.

Well that’s all I’ve got for today, which has been absolutely wild. Shoutout to the MLB network which has been absolutely AWESOME to watch this offseason.  And also shoutout to the Mets for finally signing a good player in Curtis Granderson. Yes the 4 years is more than they waned to go, but the Wilpons and Sandy Alderson needed to show the fans that they do in fact want to win, and they did that by signing Granderson. Granderson is a good piece, but the Mets still need more if they want to contend in the NL East.

I will be down at the winter meetings in Orlando from Saturday the 7^th to Thursday the 12^th and will try to update when I can.

-CRK

Brian Cashman and the Yankees have A LOT of decisions to make this offseason. So much so that it’s almost tough to know where to start. Arod’s status is in limbo, Mark Teixeira and Derek Jeter are coming off injury-plagued seasons, CC isn’t pitching like a true ace, Mariano retired; the list goes on and on. But one thing is for certain: with the Red Sox winning the World Series in 2013, the Yankees are not going to be passive when it comes to free agency this offseason.

That being said, don’t expect the Yankees to go out spending like a drunken sailor. Cashman and the Yankees have a goal of getting under the $189 million luxury tax threshold for 2014 (Luxury Tax Explained). The Yankees are currently taxed by MLB at a rate of 50% for every dollar spent over the threshold. In 2012, the threshold was set at $178 million, and the Yankees payroll was around $236.2 million. This left the Yankees $58.2 million over the threshold, and at a rate of 50% this left them with a hefty $29.1 million due in luxury tax for the 2013 season, a number far too high.

As further incentive to get under the magic $189M, if the Yankees get under the threshold for 2014, their 2015 luxury tax rate would drop from 50% to 17.5%. That’s a HUGE difference and could save the Yanks a lot of dough in 2015 and beyond.

Let’s take a look at where the Yankees stand now. The following players are currently under contract:

Under Contract: (2014 salary hit against luxury tax threshold)
Alex Rodriguez –  $27.5
CC Sabathia –       $24.4
Mark Teixeira –     $22.5
Derek Jeter –         $12.81
Ichiro Suzuki –      $6.5
Alfonso Soriano – $4      (reduced due to cash payments from Chicago Cubs)
Vernon Wells –      $0      (reduced due to cash payments from LA Angels)
Total:                     $97.71

Arbitration Eligible: (with Expected Arbitration Contract Values)
David Robertson –    $5.5
Brett Gardner –         $4
Ivan Nova –                $2.8
Shawn Kelley –          $1.5
Jayson Nix –                0     (Expected price of $1.4M, expected non-tender)
Fransisco Cervelli –   $1
Chris Stewart –           0     (Expected price of $1M, another expected non-tender)
Michael Pineda –       $1        
Total:                        $15.80

Pre-Arbitration Minor League Contracts: (These Contracts Combined Should Add up to Approx. $5M, a conservative estimate)
David Adams
Zoilo Almonte
Manny Banuelos
Dellin Betances
Preston Claiborne
Luis Cruz
Ramon Flores
Corban Joseph
Brett Marshall
Melky Mesa
Eduardo Nunez
Vidal Nuno
David Phelps
Jose Ramirez
Austin Romine
Nik Turley
Adam Warren
Total:                           $5M

Obviously the situation will look a lot different if A-Rod’s suspension, which is now in the hands of Arbitrator Fredric Horowitz, is upheld. If the 211 game suspension holds, the payroll impact of Arod’s contract would drop from $27.5M to $2.5M. But for now, the Yankees have to assume the full impact of $27.5M. That being said, here is where they stand:

Player Salary Totals
Players Under Contract:                        $ 97.71
Arbitration Eligible Players:                   $ 15.80
Pre-Arbitration Players:                         $   5.00
Salary Hit Towards Luxury Tax:          $118.51

Additionally, 1/30th of Benefits & Extended Benefits (Health insurance premiums, pension plans, spring training allowances, and player medical costs) must also be included in their Luxury Tax Payroll. In 2013 this number was $10,779,590, so we’ll allocate $11M toward the 2014 threshold.

Player Salaries:                              $ 118.51
Benefits:                                         $    11.00
Total Hit Towards Lux Tax:         $  129.51

And Finally, how much spending money does this leave the Yankees with for this offseason?

Free Agent Spening Money
2014 Luxury Tax Threshold:                        $ 189.00
Current Luxury Tax Payroll:                         $ 129.51
Spending Money:                                          $   59.49

So there you have it – the Yankees have $59.49 million with which to work this offseason. They will need to spend this money wisely, as they have more than a few holes to fill. In the coming days I will look at who the Yanks could & should be targeting.

 

-Conor