Guest Post: Timing the Market
By Jeff Imbrogno
During my undergraduate studies, my derivatives professor told me a story about one of his friends, who was an options trader. In 1980, his friend purchased options to buy silver for $50 per ounce. At the time, silver experienced a meteoric increase in price, reaching record highs. The price of silver peaked just below $50 per ounce, then rapidly declined, rendering the options effectively worthless. This individual was not ready to accept his loss. Convinced that the price of silver would quickly return to peak levels, he renewed his $50 options for a small fee plus commission. Twenty years later, this gentleman was still paying to renew these options every three months because he was unwilling to accept his loss. When I watch the 2013 Phillies, I am reminded of this poor investor. As the trade deadline approaches and the team remains in playoff contention purgatory, GM Ruben Amaro Jr. has not committed to buying or selling players. It is expected that the Phillies will wait until the end of the Tigers’ series to decide whether to move or add players, but will the team’s assets have any value by the time Amaro is ready to sell them?
With the non-waiver deadline approaching, teams have already begun making moves. The Cubs have been the most active, trading Scott Feldman for Jake Arrieta and Pedro Strop, Carlos Marmol for Matt Guerrier, and Matt Garza for Mike Olt, Justin Grimm, and C.J. Edwards. The Garza trade is the most notable move for the Cubs since it returned two of the Rangers’ preseason top five prospects. The Dodgers acquired Ricky Nolasco from the Miami Marlins for Steven Ames, Josh Wall, and Angel Sanchez, and the Orioles acquired Francisco Rodriguez for Nick Delmonico. The Rangers, Orioles, and Dodgers were all potential buyers from the Phillies that are slowing filling their needs while moving valuable assets in the process.
The Phillies appear to be in no rush to make a decision to trade players from their current roster, but the decision should be made sooner than later. There are only a finite number of teams seeking to acquire players, and a finite number of prospects of value for these players. The longer the Phillies wait, the fewer buyers there will be. It appears the Phillies believe the market will always exist for certain players, particularly Cliff Lee, but this is simply not true. First, there are teams in contention without a need for these players. For example, when discussing the market for Lee, there are very few of these teams that do not need him, but they do exist. The Cardinals have one of the best rotations in the league with depth in their Minor League system. The Dodgers have a very talented and expensive rotation. Second, there are teams that are not major deadline buyers, such as the Rays and Athletics. They have strict budgets and are mindful of the sustained success of their franchises. Trading two or three cheap potential future major league players for an expensive one or two year rental does not fit their business model. Third, there are teams not in contention. These teams may have interest in some of the Phillies’ players in the offseason, but as of now they are not interested in acquiring Major League talent. When we truly evaluate the market for potential buyers, the market may be much smaller than the Phillies or anyone else anticipates.
The other consideration for the Phillies in regards to any potential trade is their required return. Amaro has stated publicly on numerous occasions that he expects a premium return for Lee and Jonathan Papelbon. The return for Lee should be very high, based on the offseason trades for R.A. Dickey and James Shields. On the other hand, the Phillies should expect a lower return for Papelbon. The likely return for their other assets should match up with expectations. The team seems reluctant to part ways with Chase Utley and may require a large return for him as well, but Michael Young, Carlos Ruiz, and Delmon Young should not have high price tags. If the Phillies have any intention to move Lee, Papelbon, and Utley, their best move would be to extract as much value as possible before teams begin filling their needs. They have already missed an opportunity to acquire elite talent from Texas in a potential Lee trade. There is still a market for Lee, but a trade with Texas would have been their best opportunity to return two quality Major League-ready talent and more.
Based on the Phillies’ inactivity to this point, it seems more likely they will retain most of their players in hopes of competing in 2014. Michael Young and Ruiz will most likely be dealt, but Lee, Papelbon, and Utley will likely be donning red pinstripes next season. Amaro’s job depends upon the team making the playoffs in 2014, and without those players their chances to compete would be further diminished. Unless Amaro becomes uncharacteristically altruistic and decides to trade the core of this team for greater future potential, expect the return of an aging core in 2014, with a placeholder for Maikel Franco at third base, an upgrade over Delmon Young in right field, Tommy Joseph at catcher, and a few free agent middle relievers to help the team compete in 2014. In this way, Amaro is much like that silver investor: He continues to hold onto his rapidly depreciating assets in hopes that one day they may regain value. Hopefully, he takes a page out of Rays GM Andrew Friedman’s book and begins acting like a calculating investment banker.
Ed. Note: Thanks to Jeff for his submission. If you would like to submit a guest post, email it to CrashburnAlley [at] gmail [dot] com for consideration.