The Case for Signing Tony Cingrani to a Long-Term Extension....Like, Right Now

"There are contract extensions and contract extensions. This is the latter."

Earlier this offseason, Walt Jocketty stepped up and got a long-term extension done with Homer Bailey. Prior to that point, media reports stated that the Reds and Homer were "far apart" in negotiations. Like most Reds fans, conditioned by years of ownership frugality, I had fully expected Homer to walk after the year, but when I saw the arbitration hearing deadline looming on February 20th, it suddenly hit me that this is exactly how Jocketty operates. He waits until there is some type of pressure, some level of urgency for both sides to get a deal done and then he strikes.

More than most GMs, Jocketty seems to operate in shadow. It can make for interesting times for the fan base. It may be his preferred working style. It may allow him to get things done free from scrutiny. But, it can also be a weakness. He doesn't control the message that fans receive. He passes on the chance to control public opinion. That's fine when you're winning, but if things turn south then you run the risk of losing the fan base.

But, this isn't a post about Jocketty's operating style. It's about why the Homer extension and others like it make a tremendous amount of sense for the Reds right now.


TWO TYPES OF INVESTMENTS

There are two types of investment gambles: (1) finding an individual asset in which to invest that you feel is valued inaccurately by the market, or (2) finding flaws in the market itself and betting against the entire system.

An example of the first would be finding a single family dwelling that is priced $50,000 below where it should be. A residence that, because of a solid foundation, an unappreciated chandelier, and a great location is worth more than others realize. So, you buy that asset for less than it's worth and reap the value.

An example of the second would be recognizing that the entire subprime mortgage industry is completely corrupt, setting the entire housing market up for imminent collapse, and betting against the entire system.

The first type of gamble can earn you a tidy profit, the second type of gamble can make you stinking rich...if you invest heavily enough in it.

Courtesy: Gene Puskar, AP

Homer's contract extension (even if the Reds don't recognize it) actually works well under both investment scenarios.



I support the extension given to Homer Bailey. I support it because of reasons specific to Homer, including his performance line trending upward and his impressive durability. Homer seems like a good individual investment. However, in addition to these Homer-specific reasons, it's an even better idea for systemic reasons.


EXPLODING MLB REVENUE AND LAGGING PLAYER SALARIES

Revenue is exploding in Major League Baseball and has been for a number of years. However, unlike salary cap leagues that base their salary structure expressly on a percentage of league-wide revenue, MLB relies on market forces to determine the percentage of revenue that will trickle down to the players. One of the big knocks on salary caps is that they are a "wealth transfer" mechanism, shifting money from players to owners. Instead of letting market forces dictate how much of the revenue naturally goes to the players, the percentage that goes to the players is artificially established through collective bargaining. Not surprisingly, market forces typically allocate more revenue to the players than the percentages that are collectively bargained by the owners. However, when the salary structure is determined by a percentage of revenue, it is calculated on an annual basis. As a result, salary cap systems more quickly allocate revenue gains to player salaries than market forces, even if those slower market forces eventually allocate a significantly greater share of the new revenue to player salaries.

Currently, the revenue in Major League Baseball is increasing at such a massive rate that the percentage trickling down to player salaries is lagging behind. It just can't trickle down fast enough to keep pace with the new revenue, resulting in the percentage of league-wide revenue that is allocated to the players falling far below where it used to be. As of now, the MLB percentage has even fallen below the percentage of revenue that salary cap sports (NHL players receive 50% of Hockey Related Revenue; NBA players receive 49-51% of Basketball Related Revenue) mandate be allocated to player salaries.

What this creates is an opportunity for teams bold enough to grab it. As it stands, players are being paid based on an outdated reality. Player salaries haven't caught up to the revenue boom, so players are being paid less than they should be.

In short, the owners are living in the luxurious "new revenue" world, but are still paying costs under the "old revenue" reality.

Baseball contracts are largely pulled upward by the contracts of superstar players. As their contracts are extended or they receive a free agent contract, those contracts set the market for everyone below. The new market creates upward pressure on the salaries of all players below. Unfortunately, those deals don't come up all that often, so it may take awhile for those deals to reset salary expectations. That is clearly starting to happen with the recent deals for Clayton Kershaw and Miguel Cabrera, but it seems clear that there are still bargains to be had because the percentage of total revenue that goes to MLB salaries is lower than standard business practices would dictate.

Here are some rough numbers to illustrate the point:



Major League Baseball Salaries as a Percentage of MLB Revenues, Salaries per Cot's Contracts

2000: 50.02%
2001: 53.08%
2002: 56.24%
2003: 54.55%
2004: 46.03%
2005: 43.84%
2006: 41.55%
2007: 40.64%
2008: 41.33%
2009: 40.40%
2010: 40.12%
2011: 41.10%
2012: 40.14%
2013: 39.79%



Major League Baseball Salaries as a Percentage of MLB Revenues, Salaries per Lahman Database

2000: 49.00%
2001: 52.99%
2002: 56.34%
2003: 54.70%
2004: 46.05%
2005: 43.85%
2006: 41.53%
2007: 40.69%
2008: 41.40%
2009: 40.48%
2010: 38.91%
2011: 39.82%
2012: 39.10%
2013: --------



Again, what's important is the trend line, not the specific percentages. Under each salary calculation, the percentage of revenue that goes to player salaries has fallen ~10% since the 2000 season. Forbes just reported, citing to The Associated Press, that Major League Baseball spent $3,767,445,277 on total player salaries in 2013, representing 47% of total league wide revenues. So, Forbes is obviously calculating salaries differently (and, probably more accurately), but, despite the different methodology, 47% is still significantly lower than in previous years.

As it stands, the percentage may not catch up until revenue growth slows, but it seems very likely that owners will eventually, and naturally, spend what they used to spend on players. So, if the market for players isn't reflecting the "true" percentage of revenue that typically goes to players, then there are bargains to be had system-wide.

If owners are spending a lower percentage of their total revenue on labor costs, then they can afford, and will ultimate be forced, to spend more. They have shown in the past that they can effectively operate their business while paying more for labor costs. If the market for labor is lagging behind the revenue, then longer term contracts that take advantage of this disparity make sense. If you can lock in talent at the current "lower percentage of revenue labor market rate", then you can lock in a below market rate for years to come. Act before the market correction and you are ensuring significant cost savings, which would seem to mitigate much of the risk of a signing someone like Homer Bailey in the first place.

If the Reds were smart, then they'd lock up desirable assets to long-term deals now, BEFORE the market correction arrives. One asset I'd look to lock up right now is Tony Cingrani.


WHY CINGRANI IS WORTH A LONG-TERM EXTENSION

Courtesy: Tom Uhlman, AP

Personally, I don't share the common fear that hitters will suddenly adjust to the fastball. It's obviously a plus-pitch with good velocity and late hop. And, to the extent that they do adjust, it seems very likely that Tony's improved secondary offerings, which should only get better, will counteract that. And, I'm a big fan of Tony's pitching mechanics, which should reduce his risk of arm injury. So, I buy the performance level, believe he has a lower injury risk, and give him a boost in value for being a southpaw. He's a good investment from an individual point of view.


And, it's a good bet from a systemic point of view, as there are two scenarios where this type of contract would pay off:

1. Either revenues level off, but the % of revenue that goes to labor costs increases back to more "normal" levels, or
2. Revenues continue to grow, making it irrelevant whether the % of revenue increases back to more normal levels. 

Basically, this type of extension would pay off if (1) the future slice of the pie that goes to players increases or (2) the whole pie continues to grow. Either way, any contract signed under today's market reality is a potential bargain because both scenarios reflect continuing market escalation. And, quite frankly, I'm not sure I see any scenario OTHER THAN continuing market escalation playing out over the next 5 to 7 years.


MATT MOORE AS A COMPARABLE

I'm higher on Cingrani than most, so that needs to be factored in, but I think there's very likely a deal here that makes sense. If you consider the deal the Rays handed to Matt Moore as a baseline, then I think it would make a lot of sense. So, let's revisit it:

Matt Moore lhp

5 years/$14M (2012-16), plus 2017-19 options; signed extension with Tampa Bay 12/9/11
$0.5M signing bonus

12:$1M, 13:$1M, 14:$1M, 15:$3M, 16:$5M, 17:$7M club option ($2.5M buyout), 18:$9M club option ($1M buyout), 19:$10M club option ($0.75M buyout)

2017 club option increases by $0.5M with 600 IP in 2014-16
2018 club option increases by $0.25M each with 1) 85 starts or 570 IP in 2015-17, 2) 90 starts or 600 IP and 3) 95 starts or 630 IP
2019 club option increases by $0.5M each with 1) 98 starts or 600 IP in 2016-18 and 2) 66 starts or 400 IP 2017-18

The Rays signed Matt Moore to this extension after he had thrown something like 10 MLB innings. Now, the key to this deal making sense is the existence of team options. Contracts are substantially about risk allocation, the team option years shift that allocation more favorably in the direction of the team. The Rays were undoubtedly comfortable handing this type of deal out because (1) Moore had a longer minor league track record of success and (2) was more highly regarded than Cingrani.

The Moore extension was signed prior to the 2012 season, but it was also given to a pitcher with (arguably) less risk and more certainty. So, maybe a similar deal (maybe a couple million needs to be tacked on to each year's salary) could be struck now, as Cingrani's higher level of risk would help offset inflation and the revenue explosion. And, seriously, how much risk is there in that Matt Moore deal? He's set to earn $9M and $10M in 2018 and 2019? Is there ANY scenario, other than injury, in which a lefthanded pitcher with a mid-90s fastball ISN'T worth that?

Given what Clayton Kershaw just signed for and, hell, what Jason Vargas just signed for, I see very few ways in which this type of deal DOESN'T pan out. If Jason Vargas is worth $8.5M NOW, then what are the odds that Cingrani ISN'T worth ~$12M in 2019?


FINAL THOUGHTS

Personally, I think an extension for Tony Cingrani is something that should be seriously considered. Given the explosion of revenue and the lag in it trickling down to player salaries, it seems like there are more ways for this type of deal to pay off than not. Realistically, how much risk is there in a ~$12M salary in 2018 and 2019?

If I could extend Tony through his first 6 years AND get a team option year or two, then I'd jump at the chance to do it. Now is the time to spend. Take advantage of the league-wide financial conditions and the fact that Tony's reputation has yet to catch up to his performance level. Waiting, even a year, could change both of those realities. Kershaw type contracts and a top flight year by Tony would make this opportunity far less likely to happen.

The Reds were smart enough to lock up Homer Bailey under the current, below-market salary structure, but in order to get really wealthy they need to double down in their bet against the system. There is a low risk, high reward opportunity right now to exploit a systemic inefficiency. Right now, it's as much about being right about this systemic inefficiency as it is being right about the player who will receive an extension. In fact, the former will mitigate the risk of being wrong about the latter.

Sign Tony BEFORE the market correction arrives!!!

All Undervalued Team: Jayson Werth, RF

Jayson Werth has long been one of my favorite undervalued players in baseball. The common thread running throughout these undervalued players is that they have some flaw upon which the market focuses. The flaw drives down the value of the player past what his other attributes dictate that it should be.

Th flaw in Jayson Werth is his inability to stay healthy, which can actually be one of the more desirable flaws, as it may not require the player to make any changes to his game. As odd as it sounds, flaws can be desirable for smaller market teams. They can be "something devoutly to be wished", as they can create opportunities for bargain hunting.

In fact, getting more production per dollar spent is the big key to the success of the smaller market organizations. If the A's get the same amount production per dollar spent as the Yankees, then the A's lose because of the far superior financial resources of the Yankees. The A's and all smaller market teams have to develop talent and find bargains.

As for Jayson Werth, I shudder to think what value the market would place on him if he could stay healthy. To me, Werth is a unique player, because his game grades out very well in both traditional scouting and statistical analysis. Adam Dunn generates so much discussion because his production flies in the face of traditional scouting, which wouldn't rate him very highly.

TRADITIONAL SCOUTING

Traditional scouting focuses on the process (mechanics, body type, etc), while statistical analysis focuses on the outcomes of that process (HRs, strikeouts, walks, etc). Both techniques are designed to determine a player's value and likelihood of success at the next level, but go about it in very different ways. At the nexus of these two different paths sits Jayson Werth.

Werth is 28 years old, 6-4, and 210 pounds. Werth has great tools, including a very strong arm, good speed, the projectible body type that scouts like, light-tower power, and the pedigree (he's the grandson of Dick Schoefield). At the plate, Werth possess a quiet stance and a smooth swing. In short, Werth looks good playing the game. He's a natural out there.

Werth's throwing motion is a bit of a short-arm, but that's because he came up as a catcher and he certainly seems to have the high baseball IQ of a catcher, as he is a very good percentage player.

Personally, I'd recommend checking out the following link and watching a few of his highlights under the multimedia section. (Jayson Werth video highlights)

In addition to how he goes about playing the game (i.e. the process), Werth also provides several intriguing outcomes. From a statistical perspective, there is much to like about Werth.


STATISTICAL ANALYSIS

For his career, Werth has seen 4.48 pitches per plate appearance, which is a sign of a disciplined hitter. Recently, John Dewan did a study that took a look at how a team's number of pitches seen per plate appearance correlated to runs scored. In short, the teams with the highest number of pitches seen per plate appearance scored the most runs. That's because the more pitches you see, the more disciplined you are. The more disciplined you are, the higher the your On Base Percentage. And, as countless studies have shown, on base percentage correlates most closely to runs scored.

His career line of .257/.346/.431/.777 also indicates strong on base skills. His career Isolated On Base percentage (OBP-BA) is 0.089. Given what he has done during the extended periods of time when fully healthy, Werth could consistently post an OBP that is .100 points higher than his batting averge.

Werth also has tremendous power, which he hasn't demonstrated very often due to his injuries. That said, when he was healthy in 2004 with the Dodgers, Werth hit 16 homeruns in 290 ABs, which works out to a homerun every 18.1 ABs. For comparison, on his career, Adam Dunn has hit a homerun once every 14.0 ABs and Ken Griffey, Jr. is at one homerun every 14.8 ABs.

In addition, his career secondary average is .315, which works on the same scale as batting average and attempts to measures the value of the production provided by player.

BASERUNNING

For his career, Werth has stolen 19 bases and been caught 4 times in his career. That's an 83% success rate, which is very impressive. He's fast for a tall player and intelligent on the bases.

DEFENSE

In 2007, Jayson Werth has posted very strong defensive numbers in both leftfield and rightfield. His Revised Zone Rating in leftfield was .929 and in rightfield it was .925. For comparison sake, Eric Byrnes was one of the best defensive leftfielders in 2007 and he had .923 RZR, which is lower than Werth. As for rightfield, Jeff Francoeur was one of the top rightfielders and he only had a RZR of .893. In addition, Werth has thrown out 9 runners in only 573 defensive innings, which is a testament to the strength and accuracy of his arm.

While he has been very strong in leftfield and rightfield, he would likely be above average in centerfield as well. In John Dewan's Fielding Bible, Werth fared well in all three outfield spots in 2005 for the Dodgers, when he was well above average in each slot.

2007 SEASON

While Werth has long been one of my favorite undervalued players, he may no longer fit under that label if he continues to play like he has in 2007. Werth has seen increased playing time with the Phillies due to the injury to Shane Victorino and he has made the most of his opportunity.

Earlier this week, Werth went 9 straight ABs with a hit. He had a 5-for-5 game and followed it up with a 4-for-4 game. The NL record for consecutive ABs with a hit is 10, but Werth's 9 AB streak was ended by the crafty Tom Glavine.

On the season, Werth is up to .311/.404/.478/.882 and is seeing 4.52 pitches per plate appearance. If he continues to perform at that level, then his value will skyrocket.

Werth seems to finally be healthy, but now he just needs to stay that way. If he can do so, then he's likely to have a strong MLB career.

Trades and Shifting Market Valuation

Something unusual has been happening in baseball as of late and it is very relevant for us over the next month. In fact, I think it portends badly for chances at rebuilding via a firesale.

There has been a subtle, but substantial shift in the way the market values players. In short, baseball organizations are beginning to value their top prospects like never before. Baseball writers mention it from time to time, but I think the shift has really become evident this year.

I read a chat with ESPN's Jerry Crasnick last week in which he suggested the reason for the shift was that fans had become more knowledgeable about the prospects in their organization, so GMs would come under fire if they were dealt. He cited Clay Bucholz of the BoSox as an example. Personally, I don't think that's the reason.

HISTORICAL VALUE
In years past, top prospects were often dealt for half season rentals. The best example that comes to mind is the Tigers trading John Smoltz to the Braves for Doyle Alexander. That trade worked out about as well as any half season rental can, as Doyle went 9-0 with a 1.53 ERA for the Tigers and helped them reach the postseason in 1987.

However, those deals have become increasingly rare, as the opportunity cost of dealing blue chip prospects is higher than ever before. The cost of giving up the production of blue chip prospects has begun to heavily outweigh the benefits. If you are dealing away inexpensive prospects, then you likely have to find replacement production via free agency or trade. No matter where the replacement production comes from, it's going to more expensive than the prospect that was dealt away, because prospects are the only inexpensive production available in the market. Not to mention, the cost of replacement production for the prospects that are dealt away is skyrocketing.

CHANGING SALARY DYNAMICS

The average MLB salary in 1988 was $453,020 and players in their first 3 years of service time earned ~$85,000-150,000 and the top veteran pitchers were earning ~$1.75-2.0M. In 2006, the average MLB salary was $2,834,521. Players in their first 3 years of service time were earning $330-550K and veteran pitchers were making ~$10M in free agency.

Over the years, salaries have increased on average about 10% per year. The difference is that a 10% increase in $100,000 salaries is much less than a corresponding 10% increase in the cost of free agents. Accordingly, the disparity between the cost of veteran free agents and the cost of prospects has grown by leaps and bounds.

If you deal away a young prospect, you are throwing away three years of VERY inexpensive production and three years after that of below market production. Instead of getting good production over the next three years for ~$350-500K, you have to replace that production with expensive free agents at a cost of $10M. It costs you $9.5M more per season for the next three seasons in order to acquire a half season rental. In the past, you could find replacement production at a much lower cost, likely ~$2M in 1988.

So, in 1988, the Tigers could replace Smoltz for ~$1.75M. In 2006, that same type of move would cost ~$10M. Personally, I think that it is this cost increase that has led to organization valuing their prospects MUCH more highly. They are just very reluctant to deal these types of prospects.

Inflation certainly plays a part, but prospects are just a much more valuable commodity than in years past. The salary for first year players has risen 3.5 times (from ~$100K to ~$350K), but the cost of free agent pitchers has increased 5-6-7 times (from ~$2M to ~$10-12-14M). And, the cost of free agent pitchers seems likely to continue to outpace the increases in first year player salary.

CURRENT MARKETPLACE

By trading away top notch prospects, you are incurring a huge opportunity cost, because you can no longer take advantage of 6 years of bargain priced production. Dealing away top prospects for half season rentals is becoming impracticable because the cost of replacing the future production of that prospect is exponentially higher than in seasons past. The market has begun to factor in these increasing costs and the valuation of top flight prospects has changed accordingly.

In current marketplace, a player's trade value is driven by the number of years he is under the team's control and how far below the going market rate his salary is and will be. Those two factors create a kind of unique value to the team that controls their rights, which is what is desirable in the current marketplace. The value isn't created solely by the player's production anymore, but rather by the ability of the organization to obtain his production at a lower than market rate.

Unfortunately, that bodes poorly for us, as we are unlikely to reap a huge return for Adam Dunn. The cost of replacement production just doesn't make it feasible to rent high priced veteran players anymore.

This trend seems likely to continue until the salaries at the beginning of a player's career begins to increase. Until then, dealing away top prospects is a risky proposition.

That's unfortunate, given that the Reds are trying to trade Adam Dunn for young talent. At this point, I think the Reds should be willing to pay the market rate or perhaps even overpay to get certain targeted players (I'd like Jarrod Saltalamacchia and especially Matt Kemp). It's time to recognize the market shift and cut a deal with the realization that they can still be beneficial under this new market paradigm.