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Saturday, November 26, 2005

The Crazy-Like-A-Fox Contract Of B.J. Ryan

What? seems to be the immediate reaction to damn near everyone upon hearing about B.J. Ryan's 5 year, $47M contract with the Blue Jays. Ken Rosenthal calls it a contract "among the worst", suggesting that GM Ricciardi and president Paul Godfrey are "perhaps sensing that they're about to be fitted for industry dunce caps". I'm not so sure. Take a look at this:

5-year Canadian/US dollar exchange rate

That's the exchange rate for the Canadian dollar versus the U.S. dollar. The Ryan deal makes a lot more sense if you think of it as a currency arbitrage. Notice how the Canadian dollar has gained 30% over the last three years? A big reason for that is easily accessible oil and natural gas resources in the U.S. are on the decline, while Canada still has large supplies of natural gas, large (but also dwindling) supplies of oil, and a simply staggering amount of non-conventional oil in the form of the Athabasca tar sands. So there's plenty of reason to think this appreciation will continue for some time. If your customers pay you in Canadian dollars, and you pay your employees in U.S. dollars, that's a big deal; it's essentially the same as a 9% compounded annual discount on employee salaries no other club gets. Is the Ryan contract expensive? In years, definitely; in dollars, not hardly.

Rob, fantastic observation! Also, congradulations for being the first observer to point this out!!!
...so, Rob, are you short the U.S. $ and long Canadian dollars?
Hey, do I look like George Soros?

You've got this backwards. Yes, the Canadian $ is up against the US $. It's not only because of the gas/oil thing you quote, it's also because the US $ has been in the tank against almost all major currencies for a couple of years.

Also, there's no "discount" here -- $47 million US is $55 million Canadian. How is that a discount? To me, it appears to be a premium.
If the Canadian dollar continues to appreciate against the U.S. dollar, there's a discount. It's really easy.
The Canadian $ is at 14-year highs. I suppose it COULD continue to rise, but technical traders would tell you the odds are against it. But you never know.

(For technical traders - the long-term trend IS up, but it's "momentum" is down - not an easy market to trade in right now)

I think the flip side would be: what if the Canadian $ reverts back down to .65-.70ish? The contract WOULD look pretty bad, except...

I am certain that the Jays have spent YEARS agonizing over this dilemma. I wouldn't be surprised at all if they hedged their bets via the commodity markets (that IS why futures/options were invented in the first place). Option premiums act like "insurance" against any adverse market conditions; I believe it is the cost of doing business as a foreign team. "Relatively" inexpensive, but that way the Jays are protected whether Rob is right or wrong :)
Technical traders? You mean, numerologists?
The rise in the Canadian Dollar really has nothing to do with Canada's oil reserves...just an FYI. Canada's economy as a whole has been very strong.

$47 million is $47 million...that's a lot of dough.
I'll put it this way: no matter what happens, I see the balance of trade going Canada's way for a while.
Given that most baseball people can barely get their pants on, much less handle the nuances of international monetary arbitrage, and that the press regularly reports (in football, at least), contracts that will only be paid off in Monopoly money, I appreciate your point, Rob, but don't think it will do anything to avert the upcoming Hindenburg Disaster that will be Pay Eric.
I think it just comes down to the point...Why give a reliever, who pitches 70 innings a year, that type of money?

Wouldn't they be better off giving that money to Burnett?

I could only imagine what KROD will get in arbitration now...
I think it was unfair for Al to say "$47 million US is $55 million Candian." It's like saying "47 million US is 385 million renminbi," so it's a lot more expensive in China. A greater absolute number in another currency doesn't mean it's at a "premium."

A better way to look at it is this:
The contract is at $55M CAD today. But if the Bluejays had sign a $55M CAD contract at $.65 USD/CAD, it would be equivalent to a $36M USD contract. A better discussion would be "Is BJ Ryan worth $7M/year?" To sum it up, appreciation of CAD increased the Bluejay's purchasing power. So GREAT point Rob!

And to the technical analyst's point, exchange rate (especially short-term) is determined by cross-border capital flows, not a graph.
I'm NOT a technical analyst (but I did stay a Holiday Inn Express last night)...

My earlier point was: The Canadian $ rising is no sure thing. Will it? Maybe. But nobody knows - not Rob, not JP Ricciardi, or anyone else.

Rob DOES make a good point. There's just more to it than meets the eye - i.e., the Canadian $ CAN go down, too, over the next several years (I don't believe they are giving Ryan a one-time lump sum payment!). And the Jays BETTER have a backup plan for that possibility.

Currency options are EZ - it is not arbitrage, nor do they require knowledge of the entire Canadian economy. It is a simple hedge, something most people do every day with their own portfolios (in other ways, of course). If I ran a $100M+ international enterprise, I need to have (or better, know someone who has) some knowledge of international economics, currency, and futures. Something. Anything, so I don't lose my shirt if the exchange rates go haywire (for whatever reason).

btw - you know who would have that kind of mind? Bill Stoneman...

And, finally, YES - the question still comes down to, no matter what, is Ryan and his 70 innings worth ANY of these dollar figures?

Good work, Rob - you got everybody going :)
I recently bought some real estate ($130,000USD)in British Columbia, fully leveraged, and I barely have the income to support it. I know that makes me a fool, but the point I want to make is that I'm reeeaaalllly hoping CAD continues to appreciate, but I don't count on it to happen, so neither should anyone else with their ass on the line. Paying Ryan that money wasn't done for that reason. Paying him that much is simply a large gamble by the Jays. They're payroll has been low the last several years and maybe they can afford it and feel like they have the foundation to really go for it the next several years. I would say justifiably so, they do appear to have good young talent, and especially since they are in the AL East and there ain't no other way they can compete with Boston and NY. Why own a team if you aren't going to try to win? Ricciardi might be a moneyball guy, but he doesn't have the luxury of being in any of the other divisions. enough rambling...

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