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Conclusion: While the House looks like a runaway for the Republicans, the Senate is looking more and more secure for the Democrats.

We noted, with interest, Mark Zandi's (from Moody's economy.com) comments on Bloomberg this morning that, "Washington is the center of the economic universe." While we certainly do not believe it should be, it is the sad truth that the policy makers in Washington have inordinate impact on the markets these days, especially as it relates to the potential for further quantitative easing.  As such, we wanted to update our predictions heading into the upcoming midterms.

From a top down perspective, not much has changed for the Democrats.  President Obama's approval rating, according to the poll aggregate at Real Clear Politics, is effectively as low as it has ever been with a 44.7 approval rating and a 49.2 disapproval rating.  The negative spread is -4.5. The approval rating of the President has worsened over the last couple of weeks as he has hit the campaign trail and is likely to deteriorate further in the coming weeks as Republicans ramp up advertising spending.  As it relates to the outcome of the midterms, this is about as good a leading indicator for the results as there is when it relates to party preferences.

This strong aversion to Democrat candidates is also seen in the Generic Congressional vote, which polls generic preferences.  Similar to the President's approval rating this poll, also according to the Real Clear Politics poll aggregate, is at close to its worst levels as well.  Currently, only 41.2 percent of those polled prefer a Democratic candidate, while 48.2% prefer the Republican candidate.  This is a positive spread of 6.9 for the Republicans.  These preference are also underscored by a Republican base that is very motivated to vote during these midterms.  As we've previously noted, more Republicans than Democrats voted in the primaries than in any period since the Great Depression!

In the House, a Republican takeover is all but a foregone conclusion.  Currently based on district level polling, it appears that the Republicans will safely win 213 seats and the Democrats will safely win 179 seats.  The remaining seats, some 43, are currently considered toss ups.  The Republicans will only need to win 5 of the 43 seats that are toss ups to gain the 218 seats needed to claim a majority, or just over 10% of the toss ups.  Looking at the underlying momentum, of the seats that have recently shifted, 12 seats have shifted to the Republican side and only 2 have shifted to the Democratic side.  If those trends continue 37 of the seats currently considered toss ups could go Republicans, which would mean the Republicans would have 250 seats.  The last time a party lost this many seats in the midterm was the Democrats under President Roosevelt in 1942 when the Democrats lost 55 seats.

Over in the Senate, the race is much closer and the Democrats have a good a chance of retaining control. This is, of course, partially due to the fact that only 1/3 of the Senate is up for re-election every two years.  Polling at the state level currently suggests that the Democrats will have 48 seats, the Republicans will have 45 seats, and 7 seats are currently too close to call. The race that most recently shifted was the Kentucky Senate race between Republican Rand Paul and Democrat Jack Conway, which shifted from leaning Republican to too close to call.  With this shift the Intrade contract, which allows speculators to bet on whether the Democrats will retain the Senate, has been trading close to the 60% line.

The wild card over the next few weeks will be spending and turnout and with the recent inflows of capital into Republicans coffers, we should see continued gains in the coming weeks.

Daryl G. Jones

Managing Director