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Are The Experts Wrong On The Election?

Takeaway: Historically, polls in aggregate have accurately predicted the Presidential election. This year voter ID is a true wildcard.

As usual, we had a vigorous discussion in a recent research meeting on the state of the election.  I provided the update to the team that all of the indicators appear to be moving more towards President Obama over the last ten days. Specifically, in the national poll average Obama is now up +0.4, Intrade has reached a three week high with a probability of 68% that Obama gets re-elected, and Obama appears to be expanding his lead in Ohio from +0.8 three weeks ago to +2.9 today.  According to the expert pollsters, Obama is on the path to re-election.  Is it possible that the experts are wrong?

 

To start let’s look at Gallup, the longest running Presidential pollster, going back to 1936.  In the nineteen elections going back to 1936 that Gallup has polled, the organization has correctly picked the winner 16 of 19 times, so it has been correct 84% of the time.  The three elections that they missed were as follows:

  • 2004 – In their last poll leading into this election, Gallup had Bush and Kerry tied at 49.0%.  Bush won the popular vote with an edge of 50.7% to 48.3%;
  • 1976 – In their final poll prior to the election, Gallup had Ford at 49% and Carter at 48%.  Carter won 50.1% to 48.1%; and
  • 1948 – In the classic miscalled election, Gallup had Dewey at 49.5% and Truman at 44.5%.  Truman won 49.5% to 45.1%.

If we can use Gallup as a proxy for the professional polling industry, then you would have been correct betting on the experts 84% of the time for the popular vote.  The professional pollsters, in aggregate, are currently predicting an Obama win, primarily based on the President’s stronger polling in the battleground states and his edge in the national polls, albeit slight. With a 68% probability on Intrade that President Obama is re-elected, this polling data is all but priced into the market.

 

The probability on Intrade of course assumes that the polls are accurate.  In this election, more so than many prior elections, the validity of polls is being increasingly questioned, despite their long term track record of being accurate.  The key doubt related to polls this year is whether the samples accurately reflect the voters who will actually turn out.

 

In its most recent poll, the National Journal critiqued its own methodology in “The United Technologies / National Journal Congressional Connection Poll”.  They wrote:

 

“The poll’s finding of a 50-45 Obama advantage in the presidential race highlights the central uncertainty surrounding the blizzard of late campaign polling: What will the partisan and racial composition of the actual electorate look like?

 

In its likely-voter model, the Congressional Connection Poll projected that the 2012 electorate will be virtually unchanged from 2008, with Democrats holding an 8 percentage-point advantage among voters (compared with 7 points last time) and whites representing 73 percent of voters (compared to 74 percent last time).”

 

In the table below, we’ve looked at the voter ID breakdowns for the most recent polls that provide voter ID from national polls, Ohio polls, Nevada polls, and Virginia polls.  In this analysis, we’ve used those three states as they are considered by many to potentially be the deciding states in the Electoral College vote.  In fact, Nate Silver from the New York Times put the probability of these three states being the deciding votes at 71% collectively. 

 

Are The Experts Wrong On The Election? - 1

 

The high level takeaway is that across the board the polls have meaningfully higher voter IDs projected for Democrats. Based on the national polls it is a +7 advantage, in Ohio it is +6.3, in Nevada it is +8.3, and in Virginia it is +6.7.  If there is in fact more Democrats than Republicans and nationally in these key states, and they turn out in comparable numbers to the Republicans, then President Obama likely has the election won, even with an overwhelming swing of independents to Romney.  Conversely, if these voter IDs are incorrect, then Governor Romney remains very much in contention.   The prior two elections provide some insight into this voter ID question.

 

In 2008, there is no question that more Democrats turned out and more Americans identified as being Democrats.  In 2004, with Bush’s victory, this was most definitely not the case.  The key question is whether this election looks more like 2004 or 2008.  In the table below, we look at average voter IDs in the polls above and actual voter IDs from exits polls in 2004 and 2008.

 

Are The Experts Wrong On The Election? - 2

 

As the table above shows, the voter ID by party in the 2012 polls looks much more similar to 2008 than 2004.  This is surprising given that on a national level the race looks much more like 2004 than 2008.  Intuitively, it doesn’t make sense for the race to be effectively tied on a national basis but for state level polls to reflect voter turnout comparable to 2008, a year when the Democratic candidate won the popular vote. To be fair, we are comparing apples to oranges on some level as the table above looks at exit polls versus pre-election polls.  Regardless, all measures suggest that Democrats are less enthusiastic in 2012 than in 2008.

 

In the last table below, we return to the nation’s longest running polling firm, Gallup.  In this table Gallup compares the demographics of likely voters in 2004, 2008 and 2012.  They find the following:

  • In 2004, 37% were Democrats, 24% were Independents and 39% were Republicans;
  • In 2008, 39% were Democrats, 31% were Independents and 29% were Republicans; and
  • In 2012 they estimate, 35% are Democrats, 29% are Independents and 36% are Republicans.

So in contrast to much of the polling industry, Gallup is expecting more Republicans than Democrats to vote in 2012.  It is no surprise then that Gallup has Romney up 5% in its latest poll, which was given on October 29th before Hurricane Sandy hit.  If Gallup is accurate, Romney will be the next President.  But if Gallup is accurate, then the crowd of experts is wrong and the state polls, in particular, will be proven profoundly inaccurate.

 

We say profoundly inaccurate because historically state level polls have been spot on in predicting the winner of the Electoral College.  Nate Silver from the New York Times runs a probability model on the election based on state level polls and he currently has an 86% probability that Obama wins re-election.  This is due to the fact that the key battleground state polls currently lean towards Obama on average and going back to 1988 the state poll averages have been accurate in calling the winner of the state 96% of the time.

 

So in summary, the experts, via their opinion polls, currently show a high likelihood that Obama gets re-elected.  For them to be wrong, it is likely because of broad sampling errors based on party affiliation, which as we outline above there is some evidence to support.  This also jives with many of the economic predictive models that point towards a Romney victory, such as the recent call we did with Dr. Ken Bickers from the University of Colorado.

 

We can assure you of one thing: this is going to be one of the closest races in Presidential history and pollsters won’t decide the outcome.  As former Congressman from Minnesota Walter Judd famously said:

 

“People often say that, in a democracy, decisions are made by a majority of the people. Of course, that is not true. Decisions are made by a majority of those who make themselves heard and who vote - a very different thing.”

 

 

Get out there and vote!

 

Daryl G. Jones

Director of Research

 

Are The Experts Wrong On The Election? - 3

 

 

 


European Banking Monitor: Bank and Sovereign Swaps Diverge

Takeaway: EU bank swaps tightened while the correspondent sovereign swaps widened. Europe rumbles as indecision on bailouts remains.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

* EU bank swaps tightened while the correspondent sovereign swaps widened. Among the strongest movers week over week were the Italian banks, dropping by an average of 14 bps. European banks, overall, were tighter across the board. 

  

*  Euribor-OIS widened nominally by 1 bp, while the TED spread widened by 2 bps. 

 

On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated to date.

 

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If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

(o)

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European Financials CDS Monitor – The Italian, Spanish, French, German and British banks were all tighter last week, an interesting divergence relative to the sovereign swaps, which were generally wider. The largest moves were in Italy's banks, where swaps tightened by an average 14 bps. Overall 30 out of 37 European financial reference entities tightened last week (81%). 

 

European Banking Monitor: Bank and Sovereign Swaps Diverge - 55. banks

 

Euribor-OIS spread – The Euribor-OIS spread widened by 1 bp to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Bank and Sovereign Swaps Diverge - 55. euribor

 

ECB Liquidity Recourse to the Deposit Facility – The amount drawn under this facility continues to decline - a trend that's been in place since the middle of this year. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Bank and Sovereign Swaps Diverge - 55. facility


ENERGY: Playing It Safe

Right now, the safety trade is a winner for those who want to trade in and around energy. With the Energy Select Sector SPDR ETF (XLE) trailing the S&P 500 (SPY) by 9.7% year-to-date, the safety trade has outperformed. The best performing factors over the last three months have been low beta, large cap, high multiple (EV/EBITDA) stocks. The trend will likely continue with the strengthening US dollar - especially if Romney wins - putting pressure on oil.

 

ENERGY: Playing It Safe - 1 normal


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The Political Machine

Client Talking Points

The Political Machine

With the election taking place tomorrow, the candidates are pulling out all the stops and sparing no expense trying to appeal to independent and undecided voters today. It appears that Mitt Romney has taken the lead by an ever-so-slight margin, but really, this election is too close to call. It’s important to remember that the outcome of this election will weigh strongly on the markets. Romney will be US Dollar bullish and thus bearish on commodities. He’s also said he’ll get rid of Bernanke. If Obama wins, Bernanke is likely to keep his job and thus, we’ll have more of the same quantitative shenanigans and low interest rates for the next four years.

Focus On The Dollar

So with Romney ticking ahead, it makes sense that the US Dollar Index was up +0.65% last week. The index has had one down week over the last seven and is breaking out from an immediate-term TRADE perspective. Dollar up, commodities down. Remember that if you get the dollar right, you tend to get a lot of other things right. Be sure to watch the outcome of the election tomorrow because it’ll definitely affect your trading on Wednesday.

Asset Allocation

CASH 55% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
TCB

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.

PCAR

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

HCA

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road

TWEET OF THE DAY

“‘During a campaign the air is full of speeches - and vice versa.’ ~ Author Unknown” -@jackstone104

QUOTE OF THE DAY

“Nothing is as simple as we hope it will be.” -Jim Horning

STAT OF THE DAY

Mitt Romney takes the lead on Rasmussen, 49-48%, on the day before the election.


MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS

Takeaway: EU bank swaps positively diverged from EU sovereigns this past week. Meanwhile, measures of counterparty default risk rose slightly.

Key Takeaways

 

* EU bank swaps tightened while the correspondent sovereign swaps widened. Among the strongest movers week over week were the Italian banks, dropping by an average of 14 bps. European banks, overall, were tighter across the board. 

 

* In the U.S.,  consumer finance companies, moneycenter banks, and the large brokers saw their swaps tighten, while  insurance companies widened in the aftermath of hurricane Sandy.  


* The MCDX, our preferred measure of municipal default risk, tightened by 3 bps last week.

 

*  Euribor-OIS widened nominally by 1 bp, while the TED spread widened by 2 bps. 

 

* High yield and leveraged loans, our proxies for risk, were essentially flat week-over-week.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Positive / 8 of 12 improved / 1 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - Summary

 

1. American Financial CDS – Swaps continued to tighten at US financial companies. The money center banks saw another week of broad-based improvement with Citi swaps compressing a full 10 bps and Morgan Stanley dropping 12 bps. P&C insurers saw swaps widen modestly on the fallout from Hurricane Sandy. Overall, swaps tightened for 18 out of 27 domestic financial institutions.  

  • Tightened the most WoW: MTG, C, MS
  • Widened the most WoW: CB, ALL, TRV
  • Tightened the most WoW: MS, PRU, JPM
  • Widened the most MoM: CB, AIG, XL

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - American CDS

 

2. European Financial CDS  – The Italian, Spanish, French, German and British banks were all tighter last week, an interesting divergence relative to the sovereign swaps, which were generally wider. The largest moves were in Italy's banks, where swaps tightened by an average 14 bps. Overall 30 out of 37 European financial reference entities tightened last week (81%). 

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - European  CDS

 

3. Asian Financial CDS – Chinese and Indian banks were modestly tighter WoW. Japanese banks were a mixed bag with 3 out of 6 reference entities tightening. Overall, 9 out of 12 swaps tightened in Asia.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - Asia

 

4. Sovereign CDS – European Sovereign Swaps widened last week. Portugal, Ireland, and Italy saw the largest increases at 43 bps, 33 bps, and 17 bps, respectively. Meanwhile, Germany, France and Spain also saw swaps widen by 7 bps, 10 bps and 4 bps.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - Sov Table

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - Sov 1

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates rose 1 bps last week, ending the week at 6.67% versus 6.66% the prior week.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 0.3 points last week, ending at 1731.3.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - LLI

 

7. TED Spread Monitor – The TED spread rose 2 bps last week, ending the week at 22 bps this week versus last week’s print of 19.9 bps.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index fell 0.1 point, ending the week at -4.9 versus -4.8 the prior week.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread widened by 1 bp to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility – The amount drawn under this facility continues to decline - a trend that's been in place since the middle of this year. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - ECB

 

11. Markit MCDX Index Monitor –  Last week spreads tightened 3 bps, ending the week at 132 bps versus 135 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - MCDX

 

12. Chinese Steel – Steel prices in China fell 0.3% last week, or 13 yuan/ton, to 3,750 yuan/ton. Chinese steel prices are an important indicator as it reflects the activity level in the Chinese construction market, and, by extension, China's economy. After peaking in mid-2011 at 5,000 yuan/ton, prices fell over the following 12 months to less than 3,500 yuan/ton, a decline of 30%. However, in the last few months prices have rebounded to 3,750, an increase of 7%.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - CHIS

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 143 bps, 2 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.2% upside to TRADE resistance and 0.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - XLF table

 

Margin Debt - September: +1.12 standard deviations 

NYSE Margin debt rose to $315 billion in September from $287 billion in August. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag. The chart shows data through September. 

 

MONDAY MORNING RISK MONITOR: SANDY HAS LITTLE EFFECT ON BANK SWAPS - Margin Debt

 

Joshua Steiner, CFA

 

Robert Belsky

 



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