It’s been a busy year and I haven’t been able to catch as many Red Sox games as I would have liked. Granted, the urgency has been diminished by two championships in the last four years after a near century of long-suffering from close calls and dramatic second-place denouements. The championship in 2004, which broke the slump, was highly cathartic and wonderfully expressed by this surprisingly sympathetic and understanding Nike (NKE) commercial. I cry every time I watch it. Since that 2004 campaign, I’ve watched the franchise grow in sophistication. The team’s use of sabermetrics and shrewd market operations has made it the closest thing to a dynasty in Major League Baseball.

This year, my precious Boston Red Sox are once again in the playoffs and are on the verge of eliminating the Los Angeles Angels from the first round. Jon Lester, the young pitcher and cancer survivor, spun a marvelous Game 1 against the Angels and looks like he will become another ace for my boys from Beantown. His pursuit of excellence in the face of great challenge serves as motive inspiration. J.D. Drew, the marvelously talented but oft-injured outfielder, hit a late tie-breaking home run in Game 2 for the victory. Odds are, the Red Sox will win this series as few have ever come back from a two game deficit in a five game set.

The Red Sox enter the playoffs as this year’s Wild Card in the American League and many unsophisticated “gurus” or analysts would have you believe they are no longer the best team in baseball. Disney’s (DIS) ESPN staff of “experts” has put together a Power Rankings list that has the Red Sox ranked as the fourth-best team. They couldn’t be more wrong. I’m going to argue that the Red Sox are indeed the best team in baseball.

Sure, they did not finish with the best record, but wins and losses are only one way to look at dominance. I’m looking for an approach that reveals more truth by looking at the numbers behind the numbers. Much like the superiority of On Base Percentage + Slugging Percentage (OPS) as a tool for analysis over the simplistic Batting Average, which was nicely documented by the oft-cited Moneyball by Michael Lewis. Winning Percentage, and more accurately, winning percentage in the playoffs, is the only thing that counts in the end, but I think we can gain a deeper appreciation for a team’s record by looking at more nuanced numbers. At the same time, I’ll try to keep in mind jazz musician and civil rights activist Charles Mingus’ timeless insight; “Anyone can make the simple complicated. Creativity is making the complicated simple.”

Another way to look at dominance is to examine the Run Differential each team achieves. Run Differential is simply the total offense (runs scored) minus the total defense (runs allowed) over the course of a 162 game season. It stands to reason that a team that score more runs than it allows to opponents, over the course of a whole season, is a winning team. The degree to which it can score runs and limit opponents’ run-scoring should determine its level of success. The greater the Run Differential, the better the team and the more dominant its victories. A seasonal Run Differential is a measurement of a team’s sustained ability to win or dominate. The table below shows the records of the eight playoff teams.

By Run Differential then, the Red Sox should only be the second best team in baseball. ESPN has a standings report that shows the Chicago Cubs finishing the regular season with the best run differential. The lovable losers from the Windy City scored 184 runs more than they surrendered. The Red Sox only managed to score 151 more runs than their opponents. The Philadelphia Phillies rank third with a run differential of 119 runs. The emerging Tampa Bay Rays have 103 runs more than their foes. Interestingly, the team with the best record in the regular season, the Angels, only managed to score 68 runs more than they gave up.

We can’t stop at Run Differential. What if the American League is the league with better teams and thus tougher competition? What if the National League contains better talent? We need to look at what I am inclined to call Relative Dominance, Adjusted Run Differential, or something to similar effect. With the unbalanced schedule, teams play opponents from their own division more frequently. So an examination of the competition within each division could give us clues as to who is relatively more dominant. For example, the Red Sox and Rays both play in the same division and face each other more frequently. They had to assemble good records while engaged in this battle of behemoths. Perhaps the Angels achieved their best record by playing against relatively weak division rivals out West.

The idea is to award teams that assembled winning records against tough divisional competition and to penalize teams that achieved winning records against futile divisional competition. What if we simply tallied up a division’s cumulative Run Differential and added it to the playoff team’s Run Differential. In the American League East for example, we take all the teams in the division and add up their cumulative Run Differentials and get a +333 value. Then we add in the Tampa Bay Rays’ Run Differential of +103 to get a +436 value. When we do the same process for the Los Angeles Dodgers, we end up with a -203 value! The Dodgers beat up on a bunch of sissies. Below is a table of this analysis.

It is interesting to see that the team with the best record entering the playoffs, the Los Angeles Angels, and the team with the weakest record to make the playoffs, the Los Angeles Dodgers, both have a negative value for Relative Dominance. They both beat up on hapless division rivals. But Relative Dominance tells us, surprisingly, that the Angels are a lot weaker than their record suggests, given they achieved the best Winning Percentage in the American League.

The Red Sox, despite entering the playoffs as the Wild Card, is the strongest team when measured by Relative Dominance. They scored the biggest Run Differential in the toughest division, a division that included the wildly successful Tampa Bay Rays, the hated New York Yankees, and the tough luck Toronto Blue Jays. Only the Baltimore Orioles had a losing record and negative Run Differential.

I acknowledge that this is only one way to look at a team’s record.  I’m sure there are more robust methods out there like Bill James’ Pythagorean Theorem.  Are there other methods that could better describe a team’s winning record?

Of course, we still have to play the games on the field. Many say that baseball is unpredictable. I say baseball is mostly predictable but there are occasional surprises. The Chicago Cubs, the team with the strongest Run Differential during the regular season, were just eliminated by the Los Angeles Dodgers. This was a huge surprise and an Herculean feat pulled off by the Dodgers.

The Red Sox and Tampa Bay Rays are on the verge of advancing to the next round. Their matchup in the American League Championship Series will be the real World Series as they are the two strongest teams on paper. As a member of Red Sox Nation, I’m most nervous going into this next round with the Rays. The Rays are younger and hungrier – you can never discount that in life. Whoever wins the American League pennant will be the favorite to beat the National League champion. We shall see.

If the Red Sox win it all again for the third time this century, general manager Theo Epstein and owner John Henry will truly have built a dynasty. This post-catharsis dominance has been an enjoyable departure from a long bout of depressing close calls.

Macro

• More pain in the housing market anticipated as some homeowners find themselves “underwater” or owing more on their homes than what their homes are worth on the market. According to Mark Zandi at Economy.com (MCO), 10% of all homeowners currently face this negative equity situation. Zandi also sees home prices falling 20% as the economy worsens into a recession. Zandi could be underestimating the damage; homeowners abandon their homes and mortgages at a high rate when they enter negative territory on their equity. Foreclosures and abandoned mortgages exacerbate the problem by increasing unsold inventory and unwanted supply.

• More goodies from Economy.com – their data shows that core capital goods orders have been steadily declining since early 2007. One of the few bright spots in economy has been the computer servers market dominated by the big manufacturers such as Dell (DELL), Hewlett-Packard (HPQ), and IBM (IBM). In our increasingly virtual/digital economy, computer servers are as tangible a core capital good as we’re going to find. Server sales increased 3.8% from 2006 to 2007 according to Gartner, a market research firm. This data confirms what I’ve been noticing in my industry. All my peers in Internet or web technology startups are increasing their investments in technology infrastructure and talent. If there is a recession afoot, it has not reached the Web 2.0 space. We’ll see how long this lasts; venture capital, the lifeblood of many of these startups, ebbs and flows to the rhythm of the public markets and their reception to IPOs. If Facebook can pull off an IPO, which it will most likely have to do because there are few companies with the firepower to acquire it at current valuations, then the party might still continue.

• Economic Karma – It All Balances Out Eventually: India’s growth as a center of information technology accelerated as the forces of globalization caused U.S. and European companies to outsource much of their technology needs to the land of spices where the labor was relatively inexpensive and talent was comparatively competent. Now there are rumblings that India is beginning to lose some of that competitive advantage as labor costs rise and the best talent has already been snapped up with very little real scientific expertise left to bid for. I suspect that much of the offshoring budgets of the Fortune 2000 will now start allocating resources to other parts of Asia and Eastern Europe. My company, SocialOptimize is outsourcing some of our mundane coding tasks to Guatemala and the Philippines. Also, the dollar’s continued weakening might make most overseas outsourcing alternatives less attractive when compared to domestic software engineers.

Micro

• In times of recession, when unemployment is high, the unemployed go back to school to add marketable skills and increase future earnings power. The leading companies in for-profit education include Strayer Education (STRA), DeVry (DV), ITT Educational Services (ESI), Career Education Corporation (CECO), Capella Education (CPLA), Corinthian Colleges (COCO), and industry giant Apollo Group (APOL). Apollo operates the ubiquitous University of Phoenix campuses. This investment thesis has worked in past recessionary times, but the unique risk this time around is the possibility that the credit crisis will hamper students’ ability to repay or obtain school loans.

• Continuing with what may appear to be a Chicken Little theme of extreme pessimism, consumers tend to put off the purchase of brand name luxury apparel in favor of generic brands and off-quality goods sold in discount retailers such as TJX Companies (TJX) and Ross Stores (ROST). Collective Brands (PSS), the owner of generic shoes retailer Payless ShoeSource should hold up pretty well as more consumers look for alternatives to Nike (NKE). This isn’t Chicken Little, this is survival of the fittest portfolio.

• Obscure Small Company: Water is the next oil. Watts Water Technologies (WTS) makes industrial products that address the water safety, quality, flow control, and conservation needs of the market. It sells product in North America, Europe, and China. Many so-called experts have predicted that food prices will rise because of the increasing demand for nutrition from a growing world population. Few have pointed out that a lack of clean water will make food prices skyrocket even more by rendering agriculture less effective, resulting in a shrinking supply of crops.

Technology

• Adobe’s (ADBE) Flex 3.0 and AIR to launch today at Engage 2008. Adobe’s suite of software has become increasingly important for web developers. Much of my previous startup’s strategy included using Flex intelligently. My current business, which is more consulting and agency-based continues to rely on Adobe software. Simeon Simeonov, a VC at Polaris Ventures, has a very good post about how AIR can be a game-changer as a live bridge between the Web and users’ desktops. It’ll be interesting to see how creative some developers can get leveraging AIR with their social networking web apps

• The success of Guitar Hero by Activision (ATVI) and Dance Dance Revolution by Konami (KNM) validates new video game interaction models based not on hand-held controllers but on input models based on other parts of players’ bodies. Now San Francisco-based Emotiv Systems has announced the launch of a new device that detects electric signals from the users’ brains and interprets those signals to control in-game action. This new interaction model should be very interesting in virtual world environments like Second Life. Of course, the early adopter of this technology could very well be the porn industry; it is usually one of the first movers in experimenting with new technology to distribute content and products.

• LinkedIn, the social network for professionals, launched a mobile version of its website. At its current state, it is “underwhelming” but the company ought to be able to figure out new user interaction models for encouraging connections. Technically, there won’t be a dichotomy between online and offline since mobile means we can be persistently online. On the “regular” version of the website, it has always been just slightly annoying to receive requests to connect from total strangers who share no relevant interests and whose only desire is to expand their “networks.” That behavior is a slightly more grown up version of Myspace (NWS-A) users’ notorious friend collecting. The firm should ensure strong filters to prevent this annoyance on the mobile platform – mobile spam is far more intolerable than desktop email spam.