Royals Rumblings - News for July 29, 2019

Happy Monday, let’s get to the links, many trade related

Eric Longenhagen (Long-in-namen) looks at the Jake Diekman trade to Oakland and the prospects the Royals received back

Diekman has a mutual option for 2020, which probably augmented what the Royals got in return since he’s potentially something more than just a two-month relief rental. Kansas City didn’t get much back, though, and opposing teams I’ve spoken to about this deal think the Royals could have done better by waiting for needy contenders to sweat it out for a few days and offer more.

Another fan was hit with a foul ball on Saturday at Kauffman. The Royals said they would extend the netting further than past the dugout but that remains to be seen. Unfortunately maybe this recent incident will be cause for change

The Royals announced plans to extend the netting around Kauffman Stadium earlier this month, though did not reveal a timeline for the project. The fan on Saturday marks the second this month to be hit by a foul ball during a Royals game. A fan was similarly struck in the head by a foul ball on June 14.

Lynn Worthy of the Kansas City Star writes that Kyle Zimmer “passes first test” in his return back to the Royals

After getting to the ballpark after the game started, Zimmer quickly prepared and found himself in the game a few innings later. He pitched two scoreless innings, the seventh and eighth, and allowed a pair of hits and struck out two without a walk.

Leigh Oleszczak over at KC Kingdom has her thoughts on the Diekman trade as well

When it comes down to it, these prospects aren’t super exciting. Aquino is too young to really pencil in as anything and Blanco is a 26 year old prospect who missed two years of playing time. Still, Diekman got the Royals two new players who might be able to help them win some games in the coming years.

The hooligans over at Royals Farm Report, a venerable tire fire rag, had a write up too on the Oakland trade with Diekman. I should just blatantly copy and paste the entire post here that way you don’t have to visit their site but I’ll give them a break this time...

Aquino is a 20-year-old in rookie ball for the A’s. He works 93 to 96 according to one report. He has worked as a reliever this year with 20 strikeouts in 17.2 innings. Aquino has walked 11 so command may be an issue going forward. Aquino seems to be the wild card in this trade but he throws hard and is still relatively young.

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Elsewhere in baseball...

The most bizarrely run organization in the league, The New York Metropolitans, made a...misguided trade, sending two decent pitching prospects to Toronto in exchange for Marcus Stroman #HDMH

As for the Mets, it’s difficult to evaluate this move in a vacuum, since we don’t know which way they’ll go with Syndergaard, Wheeler, and the rest of their deadline plans. That Stroman’s strengths don’t align with those of the Mets — as currently constituted, at least — in terms of the quality of their defense does rate as a concern, as does the possibility that they’re in the midst of misreading the current landscape. Having said that, it’s selling Stroman short (no pun intended) to say that he won’t help the team. He’s a damn good pitcher who was quite popular in Toronto, one whose Long Island roots should make him a fan favorite in Queens.

Royals AL Central rivals, the Cleveland I******, also made a trade for some semi-inventory swap with the Rays, who have a 40-man roster crunch

The Rays were exceptionally busy Sunday, acquiring Eric Sogard from the Blue Jays for two players to be named later and trading reliever Ian Gibaut to the Rangers for another player to be named later. The Rays made one final move later in the day, trading infielder Christian Arroyo and reliever Hunter Wood to the Indians in exchange for minor league outfielder Ruben Cardenas and international bonus money. The trade of Arroyo and Wood opens up roster space for Sogard.

Deadline lessons we can learn from a few teams

Though there is nothing inherently magical about Memorial Day as a benchmark in the baseball season, treating it as such helps keep journalists and fans alike from overreacting to an inadequate body of evidence. In theory, anyway.

Every Sunday over at FanGraphs David Laurila puts together tidbits from interviews he does around the league with players/coaches about contemporary issues and what it takes to be a baseball player. His most recent piece includes an interview with former Royals pitcher Alec Mills about his pitching style

“My thing is that I’m always trying to miss a barrel,” Mills said this spring. “I’m not necessarily going to miss bats, but weak contact is usually going to result in outs. That’s what I’m looking for as much as anything.”

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Now onto the finance stuff...

In an absolute surprise to nobody, firms that go the leveraged buyout route end up going bankrupt (20%) more than those who don’t (2%) when doing a takeover

“Our results show a sharp contrast between the bankruptcy rate of the LBO target firms and the control firms: approximately 20 percent of large LBOs go bankrupt within 10 years, while the matched control firms experience a bankruptcy rate of two percent,” the research said.

Is Chewy (an online pet shopping service) the next Pets.com, the poster child of the 2000 tech bubble? David Einhorn’s Greenlight Capital wonders...

Over its life, Pets.com chewed through just over $200 million of investor capital. CHWY hasburned$1.6 billion and counting. Analyst consensus is that CHWY will achieve modest operating profits in 2023. Its market value is nearly $14 billion – more than 30x Pets.com at its peak. There is a saying that over the short-term the market is a voting machine and over the long-term it is a weighing machine. We look forward to a time when there is more weighing and less voting.

A couple links from Bloomberg to lead up to the big essay...

Though no deal is in site, the US and China trade reps are set to continue talks this week in Shanghai. Those trade talks are to figure out how to reduce or eliminate the tariffs the Trump administration has put on China, those same tariffs that have all but eliminated any GDP benefit from the “tax cut” package his administration rolled out. We really should be calling tariffs the Trump Tax instead of just tariffs, because that’s what tariffs are...a tax to consumers.

This week will be one of the biggest economic weeks in 2019 as the agenda has trade talks, a Fed rate decision, and a payrolls report to end the week on Friday.

As shown in the graph above, the wide expectation is for the Fed to cut rates by 25 basis points (or “bips”). If you are unfamiliar with the term “basis points”, each point refers to 1/100th of 1%. So 25bps is 25% of 1%, meaning 100 basis points is 1 full percentage. So the Fed is expected to drop rates by a quarter of a percent.

This rate cut has been priced in mostly in the stock market as the line of thinking is:

Cut rates = lower interest = consumers/companies borrow = consumers/companies spend more = more corporate profits = stock prices rise

Lower rates mean the cost to borrow for companies is cheaper, floating rate mortgages have lower interest, and also reduce the discount factor of the net present value of future money.

So the rate cut is widely seen as good...but should it be a bad thing? The Fed hasn’t cut rates since the foundations of the economy started to crack in 2008 (when rates were double what they are now) and cuts are to stave off any weakness the economy might be showing. But here we are, all celebrating a rate cut in expectation is will be good for the economy, not that is will help bolster a weakening economy.

As someone said recently: if you go to a doctor, and she pulls out a giant hypodermic needle, would you take that as good news or bad?

This has all been at the forefront of president Trump’s mind too (though in a selfish way, not in consideration of the economy). He has been calling for Fed chair Jerome Powell to cut rates for months, knowing that it could help continue the economic growth (that was mostly built by Barack Obama) the US has had since the expansion started ~9 years ago. He wants low rates because that’s what is in the best interest of his 2020 campaign.

Remember, back in late-summer of 2016 Trump spouted that then Fed chair Yellen was keeping interest rates low to help out Democrats (and in turn Democratic candidate Hillary Clinton). Now he’s calling for a rate cut under his administration.

Last summer there was some concerns that a Fed mistake in rates would cause a recession, but there is some research out there (sorry I can’t link to it given it is behind a very expensive paywall) that basically says that is impossible. If there is runaway inflation, the Fed can either put off the recession for a bit or it can just take the recession right now. There is no real way for them to fix an inflation problem if it exists. On the other side, if inflation is too low, they can cut rates and bring it up. If it is too high, they can raise rates and slow it down. These measures are typically corrective. Interest rate policy is not the cause of a recession, it’s a measure to prevent a recession. If runaway inflation exists, it’s unrecoverable, it can only be delayed. Recessions aren’t caused by inflation being too low, but too high.

The Fed has mandated themselves to keep the expansion going for as long as it can, which has been well received by investors and the like, so barring an unforeseen reversal of expected interest policy the market will go up for the time being.

Personally I’m a bit conflicted on if a rate cut is necessary. One of the things I don’t think gets talked about enough is that markets are a Keynesian Beauty Contest

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

What you think is going to happen isn’t what really matters. If you run fundamental analysis on a stock or economy and say “this is undervalued by 25%, I’m sure of it, here is why...” then great, you could be 100% correct but it doesn’t matter unless everyone else agrees. In other words, it’s not what you think is going to happen, but what you think everyone else thinks is going to happen. You only want to pick the stocks that everyone else thinks is undervalued, even if you think that stock is overvalued.

So while I’m not sure if the current economic climate deserves a rate cut (inflation is fine, unemployment is good, consumer confidence is still positive, PMI is positive, credit spreads are good, etc...) you have to pick what everyone else thinks will happen...