Definition of “Alpha”: A measure of investment performance on a risk adjusted basis. -Investopedia
The baseball season is now at the halfway point. Major League Baseball’s All-Star break will be celebrated in Cincinnati this week, featuring the Home Run Derby tonight, and the All-Star game tomorrow night, July 14.
The break gives us time to re-tell our favorite baseball joke:
Q: Why couldn’t Cinderella make the baseball team?
A: Because her coach was a pumpkin and she ran from the ball.
Get it? She ran from the…never mind. Cinderella may have a couple of things in common with the stock market, which we’ll talk about in a minute.
The All-Star break gives us time to analyze the “Alpha” of professional baseball. In the investment world, “Alpha” means the value (performance) added to a portfolio through decisions made by a portfolio manager.
“Alpha” is often used in mutual fund analysis. If a mutual fund invests in S&P 500 stocks, and has an Alpha of +1%, it means that fund outperformed the S & P by 1%. Investors pay management fees in hopes of earning “Alpha”. In a perfect world, you pay the least money for the most “Alpha”.
Baseball is the same way. The front office spends millions on salaries, and fans want to see winners. Fans want to see “Alpha”. Atlanta Braves fans have a special connection to “Alpha.”
Greek symbols for “Alpha”
Atlanta Braves logos
It may be a stretch to compare mutual funds to baseball teams, but it is interesting to compare a team’s salaries to the team’s actual won-loss record. Readers of this space may recall we ran this analysis last year during the World Series. We concluded there was no correlation – at least not last year – between the amount of money baseball teams paid their players and how well those teams performed on the field.
This year we’ll take an earlier look – midway through the season – to see if there is any correlation between pay and performance – and to see which teams are adding “Alpha”. Listed below are all the teams in Major League Baseball and their player payrolls. The teams are ranked high to low by payroll, with their mid-season won/loss record in the middle.
We offer a few conclusions at the bottom of the table.
Many conclusions may be drawn from these numbers, but a few trends are shaping up midway through the season:
- The LA Dodgers spend the most money in baseball, have the fourth-best record and lead their division. Conclusion: they’re getting good performance for their money.
- The St. Louis Cardinals have the best record in baseball but are ranked 11th in salaries. They’re getting more “Alpha” than the Dodgers.
- The Philadelphia Phillies are the worst team in baseball, but ranked in the top third in salaries. Conclusion: the Phillies are delivering “negative alpha”.
- The Pittsburg Pirates and Houston Astros pay low salaries and have excellent records. Pirates and Astros managers are adding the most “Alpha” in Major League Baseball.
A Cinderella Story?
Last week a New York wire-house described the market as a “Cinderella Market”. Fairy tales are occasionally used as metaphors for the stock market, for example a “Goldilocks Market” is “not too hot, not too cold…just right.” But Cinderella?
The wire-house said early last week the market was “dressed-up and ready to for the ball” – in other words, ready to break out above a narrow summer trading range – until “two wicked step-sisters locked stock prices up.” The two wicked step-sisters were Greece and China.
The market escaped the wicked step-sisters toward the end of the week, and by the closing bell Friday had redressed all the early-week losses.
The wire-house’s point: stocks may be “headed again for the ball”. In other words, they think the market will test highs again soon. Hope it doesn’t turn into a pumpkin.
Comment: Angela Merkel is the fairy godmother?
The Week Ahead
All-Star Home Run Derby – Monday night – 8PM
86th Annual MLB All-Star Game – Tuesday night – 7PM
Economics – Kaitlin Matheson
Housing Starts: This Friday the housing starts report will be released. Housing starts are derived quite literally from the documents registered at the start of construction of primarily residential property.
Investors watch this report because of the ripple effect it has through the economy and the markets. In normal situations, housing construction is a sign of good economic times, which reflects positively on the markets. During the early and mid 2000’s, we saw a steep rise in home prices and construction because of a credit ease to consumers. The markets responded, and it looked like the sky was the limit. However, predatory home lending practices overheated the market and caused a bubble. All bubbles must eventually burst, as did this one. In my opinion, bubbles in the real estate markets will continue to occur. It is human nature to let excitement take over judgment when times are good. There will always be those who hunt and those who are hunted in the markets. In a world of information overload, common sense and prudence can be priceless. Always second guess, and do not let blind enthusiasm take over critical wisdom.
Kaitlin is a nationally recognized economics student at Clemson University.
Tuesday brings Retail Sales, Import and Export Prices. On Wednesday watch for the PPI and Industrial Production. Thursday provides Jobless Claims. Friday offers Consumer Price Index and Housing Starts.
Tuesday, July 14: CSX Corp, Johnson and Johnson, JPMorgan Chase, Wells Fargo, Yum Brands
Wednesday, July 15: Bank of America, Delta Airlines, Intel, Kinder Morgan, Netflix
Thursday, July 16: Advanced Micro Devices, BB&T, Citigroup, EBay, Google, Keycorp, Mattel, Philip Morris, PPG, Charles Schwab, Schlumberger, Sonoco Products, Seagate
Friday, July 17: General Electric, Honeywell, Suntrust, Volvo