For those who follow the goings on in the financial markets closely, the recent rally in the US Dollar in terms of the trade-weighted index was quite an event, considering the extreme weakness of world's reserve currency over the past 7 years. The blast upwards to 76 on the index has some people proclaiming (and I'm not one of them, mind you) that the Bear Market in the dollar is over:
"This is the watershed week for the US dollar," said Marc Chandler, currency strategist at Brown Brothers Harriman. "The magnitude of the dollar's moves and the breaking of key technical levels suggest that a major shift in the outlook towards the dollar is occurring as massive positions are adjusted." Other analysts described the widespread buying of dollars as "capitulation"One might be wondering what this has to do with the NHL, and, as the title of this post suggests, the salary cap? Allow me to build my case slowly if you would. Considering that according to this article in the Toronto Star I found at this post by my old blogging buddy the EclectEcon over at the Sportseconomist.com, the driving force behind the >10% rise in the salary cap for each of the past two seasons was the strengthening Canadian Dollar:
The increase in the value of the Canadian dollar may be responsible for as much as half of the league's revenue gains since the NHL went through the lockout of 2004-05, say several sources familiar with NHL finances.
"If you take out the Canadian teams, which have done so well since the lockout largely because of the Canadian dollar, the league's revenues are actually only growing at a 2 per cent clip per year," says an executive with a U.S.-based NHL team, who requested anonymity.
With the Loonie averaging near parity with the $USD over the past year and having broken down out of the box formation that held it in check between $1.02 and $0.97US for the past 9 months to its closing price as of this writing to $0.938, there is a real possibility of a contraction in league revenues due to this breakdown of the exchange rate.
Looking at the latest payroll numbers for the players signed by all 30 teams, the total salary committed is $1.508 billion USD, or 58.9% of last year's revenues of $2.56 billion USD. That figure includes the LA Kings being considerably under the salary floor by a wide margin and a few teams being above the cap by a few million USD. If the players are due 56% of revenues, then total revenues must rise to $2.691 billion USD, or by 5%, for the players to get 100% of their contracted salaries. As The Mirtle pointed out when the Star article when live, the Cando averaged $1.007 USD during Oct. 07 to Apr 08, a full 14% increase over the same period the year previous. If the exchange rate collapse continues into the fall and the Canadian Dollar trades as low as $0.90, the likelihood of reaching those revenue projections is doubtful at best.
In a sense, the NHL is at the mercy (like all of us, really) of the dominant monetary powers in the world. If the US Dollar had collapsed below the 71-72 area, it may have gone into another free-fall to the low 60's, which would have triggered a world-wide panic in the financial markets as foreign Central Banks off-loaded their US Treasury debt in a disorderly manner. If there is one thing you can count on with bankers though, they don't like things disorderly. So, even a US Dollar grizzly bear like me has to admit that they would put in at least one solid stand against that chaotic outcome. Hence, the corrections in gold, oil, grains and base metals from overbought positions and the simultaneous jump in the dollar.
There is tremendous weakness in a number of the NHL's US markets and if the Loonie is not there to help prop them up by repatriating Canadian Petro-Dollars via revenue sharing, I don't really see how they can survive in an age of dollar strength. It's ironic, after all, that at the turn of the millennium it was the over-valued dollar that nearly bankrupted the smaller Canadian franchises like Edmonton and Calgary while the US housing boom (Greenspan's final act in his 20 year Bubble Blowing Bonanza) propped up marginal hockey towns like Phoenix and Miami. Now, these teams are dependent on increasing injections of revenue sharing (liquidity) from those Canadian teams to have even the illusion of prosperity. This is very similar to the our foreign creditors funding the US Treasury's Current Account Deficit and the minute the stop doing so, the party ends rudely.
In case you're shaking your head over just how much of a geek I am for this stuff, rest assured I'm holding back for the sake of brevity (... he says as this post tops 1000 words and 2 hours of my life).
NHLPA Executive Director Paul Kelly is doing his 30 city tour to get the players' opinion on the CBA and the salary cap, collecting feedback as he heads into the negotiations with the league as to whether to extend this CBA into the first of two potential option years. As with all things, when times are good, everyone's happy and complaints are minimal at best, but the minute things start to go bad even a little, the grumblings will being in earnest.
My opinion is that this is a classic "Dead Cat Bounce" in the US Dollar orchestrated just in time for the November elections, but that doesn't mean it can't be strong enough to last a few months or even a year, which would be just enough time to sink this season's revenue projections and potentially the extension of this CBA.
Ta,
Reader Comments (Page 1 of 1)
8-14-2008 @ 8:15AM
Gerald said...
Unfortunately, while I do appreciate that you are citing an article from the Star, I have actually done a full set of calculations and determined that the impact of the Canadian dollar on NHL revenues (and consequently the salary cap) has been far, far less.
Being a longtime and vociferous commentator in respect of this issue, I was asked by James Mirtle not long ago to do some calculations for his website, as I have done a fair bit of work and research in regards to this issue.
Using both the terms of the CBA itself (a document with which I am quite familiar and have a measure of facility, since my day job is as a corporate lawyer) and cited evidence regarding NHL revenue sources, I determined that NHL revenues have been impacted far less than was suggested by the Star's apparently math-challenged sources. Even after the dramatic ten-cent increase in the CBA-mandated calculation of the exchange rate this past season, the cap has been impacted by only about $3.5 million dollars. The overall impact is less than a quarter of NHL revenue gains since the cap came into effect.
The effect of every cent difference in the exchange rate is less than $9 million. This amounts to 1/3 of one percent of NHL revenues. If the CDN$ drops to .90, that will be an 8.5 cent drop from last year's CBA-calculated exchange rate. That is less than 3% of NHL revenues. That type of money iseasily overcome by huge revenue increases in CHI, PITT and WASH, among others that will experience substantial revenue increases for various reasons next year.
My detailed work on this is posted on Mirtle's site, as well as on HFBoards' Business of Hockey site. I can provide you with links if you or your readers wish.
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8-13-2008 @ 8:29PM
Tom Luongo said...
Gerald,
Good to hear from you, I've been a long-time reader of your tussles with Tom Benjamin over at his blog and appreciate your perspective greatly.
But, I actually got into a discussion with Mirtle on this subject last night as I finished the article. I read that post of his and the comment thread.
http://mirtle.blogspot.com/2008/07/loonie-boost-dollars-effect-on-salary.html
I agree with the numbers, such as we all know them. I'm also not convinced that any drop in the exchange rate is as inconsequential as one would like to think based on last year's numbers. What I find interesting is that both yourself and Mirtle think 25% (and that number is highly dependent on the believability of the arbitrary cap of $39 mil in 2005-06) is an inconsequential amount. Where I come from 25% is a lot, and it is something that is completely beyond the control of the business entities that make up the NHL. It is, as I point out, completely dependent on the actions of the Central Bankers in the US, Canada and the EU, the latter somewhat indirectly, as well as the extent of the damage to the balance sheets of their money center banks.
As well, a drop to $0.90 would be a 10% drop from the $1.007 ($0.10 / $1.007) mean of 2007-08, which directly translates to a 10% drop in revenue from the Canadian teams. Now, that is a 3% (10% of the 31% the Canadian Teams contributed to total league revenues) drop in League revenues, assuming that again only 3 of the 6 Canadian teams make it to the playoffs like in 2007-08, or ~$77 million USD, about 2.5 million off the salary cap. Correct me if I'm wrong, but I think I've recreated your numbers pretty well here.
As I pointed out to Mirtle privately last night, what happened in 2006 or 2007 is irrelevant. Economic decisions are made at the margin given the present circumstances and the price of labor in the NHL today is based on the expected upward rate of change of the cap plus the present value thereof. Judging by the spending habits of the GM's this summer I'd say they are pricing in at least another $2.8 to 3 million USD rise in the cap at a time when the exchange rate for 6 of their strongest markets has moved against them.
As for the US markets, for every Chicago, Washington and Pittsburgh, I can counter with Florida, Tampa, Phoenix, Atlanta, Carolina, Nashvegas, St. Louis and even Buffalo (b/c I don't think can expand their business much beyond where they are now). To couple with those soft markets is the pretty soft, and getting softer by the day, US Economy which can't afford $3 gasoline, no less the current $4.
Hell, I'd add Detroit to the list of shrinking revenue markets because of the dire straits the Auto industry is in and when GM is losing $104/share (no, I did not misplace the decimal point, they are, effectively, bankrupt), buying a block of tickets to hand out to clients is not high on your priority list. Of course, that is just conjecture on my part, and maybe a little bit of advice to the management.
I understand that the currency is not the only factor in the rise in revenues but at the same time at between 25-33% it is a significant enough factor to make the situation vis a vis the contracts on the books at a time when the CBA is up for renewal that much more touch and go.
Thanks for chiming in (I was expecting/hoping you would at some point today).
Ta,
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8-14-2008 @ 9:24PM
Gerald said...
Thanks for the sentiments, Tom.
I am not sure if it is accurate to state that the idea is that 25% is inconsequential. The point IS, however, that the exchange rate escalation is not by any means the "driving force" behind the increase in NHL revenues and that the Toronto Star suggestion that it is "as much as half" of ANYTHING is complete balderdash written by guys who apparently skipped anything beyond grade five math.
A few points:
1. I agree that exchange rates are beyond the control of the NHL. This is the same position that every cross-border business has. That being said, I am not sure if exchange rates are even within the control of central bankers. As I have posted elsewhere, one of the biggest unwritten financial stories of recent times is the discovery by the speculation portion of the investment community that they can actually play around with the former 800 pound gorilla of the financial world - the US greenback. As much as the dismal scientists would like to believe otherwise, the recent roiling of the US$ over the past 1-2 years has to do with speculation and little to nothing to do with economic fundamentals.
2. $1.007 was not the mean for 2007-08. It was (if I remember my own numbers) about .9859 or so. The CBA-mandated formula is for the average from July 1 to june 30 of the following year.
3. Keep in mind that in order for the dollar to go down to .90 in your example, it has to be an AVERAGE of .90 for that entire July1-June 30 fiscal year. Thus it would actually have to go fairly significantly below .90 at this point and stay around there for the rest of the fiscal year.
4. I do not understand where you would get the idea that the league's GM's are pricing in a higher cap. They spend as they do because the safety net of escrow is there. If they overspend, the corrective device of the escow will cure any resultant discrepancies, for the most part. As well, they are below the cap collectively. Because of the averaging of cap hits, they cannot preemptively get in trouble by making long term commitments for more.
5. Also, you forget the fact that there is an automatic 5% kicker added in to create the salary cap. Even if revenues are not sufficient to achieve that level with the added 5%, it is a default number, so that even if revenues are flat, when the cap is calculated for the following year, the extra 5% is thrown in (unless the parties agree otherwise).
6. Even if the Canadian markets were to lose nearly all of the exchange rate increase from the previous year, the losses will be substantially offset by revenue increases from the Canadian teams arising from ticket price increases, new revenue streams and the like. As well, the new CDN TV contract kicks in this year, which will increase revenues by $50-60 million by themselves. That in and of itself would offset a substantial exchange rate hit of 6-9 cents.
7. As for countering with the teams that you mention, you do not select well. To cite one example, both NASH and ATL will garner full revenue sharing. Under the CBA, in order for this to occur those markets must be increasing their revenues by more than the league average. Accordingly, it is not a very good argument to suggest that they are a drag on growth. Quite the opposite - they contribute more than their fair share of growth. Tampa's revenues are more than solid, according to every metric that has been published in the Star, Forbes and elsewhere. i am not sure if you are aware, but St. Louis experienced an enormous revenue jump this year, reaching their previous year's ticket revenue before the seaosn was half over(!!). Carolina has very solid ticket revenue as well, easily in the middle tier of franchises. Buffalo has reportedly increased their ticket prices substantially, with no correspondent reduction in demand (understandable, given that their ticket prices were too low, thus leaving lots of room for growth). All in all, that is an exceptionally dubious selection of supposedly "soft" markets. The only one you might say is appropriate is Phoenix, but impacts on its low revenues is a drop in the bucket when considering it in the context of over $2.5 billion.
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8-19-2008 @ 4:42PM
Tom Luongo said...
Gerald,
Thanks for the reply, I didn't not get notified of it somehow, and have now just read it.
On point #1 I have to respectfully disagree, the USD has been taken to the woodshed because it was fundamentally over-valued in relative rates of monetary creation. That trend has temporarily abated since Bernanke took over and has been attempting to hold the Adjusted Monetary Base flat to negative for the past 18 months or so. The AMB is the tightest definition of the Money Supply and the one that Fed has the most control over. To do this he has swapped treasury debt with mortgage securities, but nonetheless that's been his plan... deflation, in the face of a credit derivative maelstrom. This bounce in the USD was inevitable considering that course of action.
The strength of this policy may well turn into a counter-trend rally of some significant time-frame, which would put pressure on the exchange rates.
Your other points are well-taken and may, in fact, overwhelm some of my other concerns.
As to point #4, I understand the role that escrow plays in the decisions of GM's to negotiate salaries they won't have to pay if the revenues don't support it. But, as well, those contracts do, in fact, exist as if the cap will increase by at least 5% next season to around $59 million USD. If the recession/depression in the US really begins to impact entertainment spending, as I suspect it will, then markets that are 'solid' now will not be by the time April comes around.
Personally, I think the Sabres, for example, may have a hard time truly selling out some of the upper-tiered games of their schedule. Reports of the HSBC arena not being truly full on some nights last season were common enough, regardless of the announced attendance. Considering that walk-up sales are a higher percentage of their revenues than other teams, by the nature of their discounted Season Tickets, it's something to worry about in terms of growth.
Regardless of whose conjecture at this point is correct, I do think this is an issue that will be worth looking at as the season progresses.
Thanks again for the information, it may take a bit more time for me to get completely re-informed after my lengthy hiatus.
Ta,
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