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Conclusion:  We are becoming increasingly convinced that that the Republicans will take back the Senate, which is supported by new data from Intrade.  Further, a major Republican win is clearly becoming priced into equity markets.

As Election Day 2010 looms in less than a month, the proverbial gloves are being dropped across the nation with political rhetoric from both sides taking a more aggressive tone.  In particular, the Democrats seem to be turning up the volume in terms of negativity.  Strategically, this may actually be a decent strategy, as the Democrats currently appear to be in dire straits.  Not only do the Democrats continue to lag in key polls, which we’ll touch on, but some of their large supporters from recent years seem to be losing interest in supporting politics.

In particular, we would highlight this quote yesterday about George Soros in the New York Times:

“Mr. Soros, a champion of liberal causes, has been directing his money to groups that work on health care and the environment, rather than electoral politics. Asked if the prospect of Republican control of one or both houses of Congress concerned him, he said: “It does, because I think they are pushing the wrong policies, but I’m not in a position to stop it. I don’t believe in standing in the way of an avalanche.”

Avalanche does indeed seem like the appropriate adjective given the results from some recent polls.

The polls we focus on most consistently in terms of predicting a potential upside surprise for the Republicans are the Generic Congressional Polls.  This is a poll that measures the generic preferences of Likely Voters.  Real Clear Politics aggregates all of the polling companies into an average (which is charted below).  Currently, the Generic Congressional Poll is as wide as it has been in this electoral cycle for the Republicans with 48.1% of those polled likely to vote for the Republican and 41.3% of those polled likely to vote for the Democrat.

Dropping the Mitts . . . Less Than a Month Until Election Day - 1

Additionally, Intrade has open futures contracts on both the Senate and House. Currently, the contract for the Republicans taking the House is trading at 78.7, which is basically its highest point of this election cycle. The contract for whether the Democrats will keep the Senate is also now leaning Republican, as it closed below the 50 level last night with a closing price of 48.5.  This contract has seen a dramatic decline in the last few weeks as the likelihood of the Democrats maintaining the Senate seems more and more unlikely based on recent data.

Dropping the Mitts . . . Less Than a Month Until Election Day - 2

In terms of the race for the Senate, the Real Clear Politics poll averages currently have the Democrats holding 48 seats, the Republicans winning 46 seats, and 6 seats currently too close to call. Interestingly, over at Pollster.com the Republicans are doing even better with 48 seats, while the Democrats have 47 seats with the remaining seats too close to call.  The most noteworthy race to recently shift categories is the Senatorial race in California between Barbara Boxer and Carly Fiorina, which has gone from Leaning Democrat to Too Close To Call, as Fiorina has narrowed the gap.

As we stated from the outset, the continued shift of the date towards the Republicans seems to have heightened the rhetoric of the Democrats.  As part of our research process, we receive campaign emails from both Democrats and Republicans and were somewhat interested to receive an email this weekend with this statement inserted:

"This is a threat to our democracy... And if we just stand by and allow the special interests to silence anybody who's got the guts to stand up to them, our country's going to be a very different place.


That's what the President just said about the Chamber of Commerce, a right-wing group spending $75 million to beat Democrats this fall, and reportedly taking money from foreign corporations -- some even owned by foreign governments.”

This statement from President Obama was made in conjunction with the video below, which attempts to tie the Chamber of Commerce, to President George W. Bush, and to foreign sources of money:

http://weblogs.baltimoresun.com/entertainment/zontv/2010/10/democrats_hit_new_low_with_tho.html

We were somewhat surprised to see President Obama, specifically, target the Chamber of Commerce, but to be fair the Chamber of Commerce has aggressively ramped up its lobbying efforts in the last decade.  In fact, in 2009 the Chamber of Commerce spent $144.5MM, up from $18.7MM in 2000, and is now the largest spending lobbyist by a factor of 5 (next is Exxon Mobil).  The vast majority goes towards Republican causes and candidates.

As we stated above, strategically it does make sense for the Democrats to amp up the volume on their attacks and try to bring back into focus the economic track record of the Bush administration.  There is also risk in this strategy, though, as the Chamber of Commerce, despite its lobbying efforts, legitimately represents more than 3 million U.S. businesses and, based on many polls, is a widely respected organization.

Regardless, with the Democrats facing an avalanche, as per George Soros, the next couple weeks should lead to an acceleration of aggressive attacks.  While there is potential that these attacks narrow the gap, there is also some probability that these attacks push voters further away from the Democrat party in the upcoming midterm.

Daryl G. Jones

Managing Director