Here is the thing.
You don't know about free agents, especially with the village idiot running the team.
You guys forgot about Moose.
1. Resign Moose. One year deal. He's stated he wants to come back, and his change of pace stuff helps the top of the order Joba. No risk here.
2. Offer Pudge arbitration. Hope he walks. Tell him he's the backup even if he wins. I would seriously look to move Posada if at all possible. I don't think it's possible.
3. Buy out Giambi. You can't risk arbitration with him. Offer him a one year deal if he wishes to stay, and you don't land Teixeira. If Tex lands with the Yanks, the Yankees should trade Matsui, who has some value and DH Giambi. Tex is really not a priority for the Yankees. They should get into the bidding simply to drive his price up for the Mets/Sox. I'd much rather see CC or Sheets than Tex, as good as he is. I'd rather have Giambi for 10 mil for one year than Tex for 20 million for the next 5-10.
4. Open the vault for CC. It's obvious he can pitch, and the Yankees need a dominant lefty. He should be called at 12:01 when free agents are available.
5. Bring back Abreu. There are a core of Yankees who will take one year deals to remain. Abreu, Mussina, and Giambi. They should all be back, and if any of them falter, that's their final year here.
6. Marte/Nady..if options are available, they should both be picked up. Both players are on next year's roster.
7. Package Kennedy and Cabrera for a bona fide player, if even remotely possible. Some team will take a chance on Kennedy. Same with Melky. They may still have some value. I would explore the Mariners with Bedard. He seems to have worn out his welcome, and if you can get him, I'd run with it. I know it would take more than Melky and Cabrera, but it would be a start. I wouldn't trade an star prospect...ok, maybe I would, but I don't think you'd have to.
8. Bring back Pettitte, but not at 16 million. Offer him around 10 if he wants to stay. If not, enjoy Texas.
9. Shift Nady to CF. The Yankees defense will be weakened, but under no circumstances should Melky start the season in CF. He is back to being a replacement 4th OF, and will most likely be traded with Kennedy, according to my plan.
10. Posada, if he remains, should be a 1B/C. Molina should catch the majority of the time.
The Yankees lineup [assuming they do not get Tex, should look as follows.
LF Damon
SS Jeter
RF Abreu
3B Rodriguez
DH Giambi/Matsui
CF Nady
1B Posada
2B Cano
C Molina
Rotation
CC [hopefully]
Joba
Wang
Moose
Pettitte [if he returns]
Hughes is given a shot to win the long relief role is ST. With Moose and Pettitte, he's bound to throw a lot of innings anyways.
As for the pen, I don't know who will be available, but it doesn't really matter outside of Mo. They are all average at best.