Trader’s Narrative

The prediction markets and the polls were correct. Barack Obama is the next president of the United States of America. As a quick aside, America please accept my hearty appreciation and congratulations for your choice. If you listened carefully, just before the thunderous celebration across the globe, you heard a sigh of relief.

Putting aside today’s market slide of 5%, the important question is what does Wall Street prefer? a Democrat or Republican in the White House? Republicans’ reputation is of being more capitalist and business friendly, and the Democrats of being “tax and spend” as well as more prone to regulation. But just like the myth of gold as a safe-haven, the facts do not support this assumption.

Here is a chart showing different historical returns for the stock market under different administrations (source: Federal Reserve Bank of San Francisco).

The biggest outliers in recent history are, of course, Coolidge who’s presidency oversaw the 1925-1929 bubble and Hoover, who presided over the bust that followed. But even if we ignore these or by extension of the time horizon, go back far enough, the relationship still holds: Democratic presidents coincide with much higher stock market returns.

Another study that looked at the relationship between politics and investment returns was by Pedro Santa-Clara and Rossen Valkanov. Their paper titled “The Presidential Puzzle: Political Cycles and the Stock Market” was published in The Journal of Finance in October 2003. In it they show that during Democratic governments, the US stock market (between 1927 - 1998) provides an excess return of 10.69% above the 3 month Treasury Bill rates. While Republican presidents provide an excess return of 1.69% over and above 3 month Treasury bill rates.

According to Ned Davis Research the S&P 500 Index performs poorest in the first year of the four-year election cycle. Since 1900, the stock market does best in the pre-election year (11.3%) and the election year itself (9.5%). The pre-election year didn’t live up to its historic pattern - to say the least!

Here is a recent visualization from the New York Times, showing 80 years of market returns:

Source: New York Times

If you aren’t satisfied with this myth being upended, here is an interesting tool that lets you make different assumptions about the stock market returns under different administrations. For example, you can check what would happen if we include dividend reinvestment. Or what about the effects of inflation? And time lag for policy effects? You get the idea.

President-Elect Barack Obama
In case you didn’t catch it, here is Obama’s victory speech (putting Cicero to shame).

There are just a few days left until we know who the next President of the USA will be. Here are two aggregations of multiple polls:

FiveThirtyEight is a relatively new site which has gained a lot of attention because of their methodology. They assign each poll a weight based on its historical track record, the sample size, and the freshness of the poll.

They run a regression estimate based on the demographics in each state to account for outlier polls and to put the data its proper context.

Finally, 528 simulates the election 10,000 times for each update to provide a probabilistic assessment of outcomes based on a historical analysis of polling data since 1952.

The end result of all that? FiveThirtyEight is giving Obama a +96% chance of winning the election. This number fluctuates daily as new data is integrated. You can watch this and other information here.

But since this is a trading blog, lets take a look at the electronic markets where people don’t just give an opinion, they back it up with cold, hard cash. These “prediction markets” are also favoring Obama by a landslide.

Here is the intrade contract for Barack Obama, implying an 85% probability of winning:

Here is the Iowa Electronic Market for the US election, winner take all:

And here is betfair:

It seems like everyday another prominent Republican endorses Obama. People it seems, question his judgement, age and the tone of his campaign. The first and second go together because of his pick for VP, Sarah Palin, of course.

At first Palin energized the ailing McCain campaign but as people have gotten to know her more, she has become one of its biggest handicaps. From not knowing what the constitutional role of a VP is (”in charge of the US senate”), to wearing a $150,000 wardrobe and $22,000 make up artist while claiming to be a hockey mom, to not knowing what the 1st amendment means, to believing that the pledge of allegiance was written by the founding fathers, to not being able to name any media she reads, to not knowing any Supreme court cases other than Roe v. Wave, to not knowing the Bush doctrine…. need I go on?

I can’t blame anyone for being scared of this woman’s ignorance. As an average Canadian, even I know more about the United States and its constitution that her!

Who Wins? Who Loses?
Under an Obama administration the winners are clear, infrastructure companies, alternative energy companies like solar, wind, water/wave, etc. Defense spending and homeland security as well as big oil may have to butter their bread a little less.

What is amazing to me is that while the data historically has shown that Democratic governments have been a boon to the US economy, lowering unemployment, the deficit and even ushering in bull markets, the Republicans somehow have the image of being business friendly. Go figure.

While Obama’s provenance and religious leanings have been questioned, I find it rather odd because I find that that is one of his best strengths on the international front. Can you imagine the amount of goodwill that will be engendered in the Muslim world when the face that represents the people of the United States of America looks like them? What do you think that will say about the unity and diversity of the US? about its capacity for meritocracy? Maybe you Americans have never thought about it that way, but believe me, as an outsider, that is a major bonus that Barack Obama has.

Not that you should be voting for him based on that. Not at all. Vote based on the candidates’ judgements, platforms and ideas. If you are a US citizen, VOTE !!

Ronald Reagan Endorses Obama

Ronald Reagan did in fact endorse Obama. Ronald Prescott Reagan that is, the son of the former POTUS.

The only person it seems who hasn’t endorsed Obama is John McCain himself. Wouldn’t that be the ultimate move from a true “maverick”? to endorse your own opponent?

Somehow, for some strange reason a progressive tax system which is what the US has had and which it will continue to have, has been called a “socialist” system by the McCain campaign:

“His (Obama’s) plans are redistribution of wealth.. that is one of the tenets of socialism.”

But as anyone will readily attest, a progressive tax system does exactly that, it “spreads the wealth around”. The only question which the government and candidates haggle over is not if wealth will be spread around, but how much.

By now Obama and McCain’s tax plans have both been picked cleaner than a carcass by a pack of economists from both sides of the spectrum. There is unanimous consensus that Obama’s tax plans will give more money to lower income earners and tax the wealthy a little more. Take a look at this excellent visualization for more details (courtesy of ChartJunk)

So is taxing the wealthy a tad more a bad thing?

John McCain doesn’t think so. Or at least, didn’t used to think so.

Listen as he answer’s a young woman’s question in this following video. She even brings up the “S” word (socialism) and McCain rightfully bats it down graciously.

“When you reach a certain level of comfort, there is nothing wrong with paying somewhat more”

“I think the first people that deserve a tax cut are working Americans with children…”

Where did this McCain go? This version would have stood a chance of actually winning against Obama. This version wouldn’t have given more tax cuts to millionaires while ignoring “working Americans” as his current tax plan does.

Look, I consider myself a capitalist through and through. Having said that, it doesn’t take a genius to see the inherent problem that concentration of wealth presents to any society. We are not a collection of individuals, we are a community, a society and we need to understand that. What is best for 0.1% of the wealthiest shouldn’t be ahead of what is best for the 99% of the rest of society.

For this and (many) other reasons, I’m saddened that as a non-US citizen I can not take part in this US election and vote for Barack Obama.

Here’s another indicator which dovetails nicely with everything else we’ve seen measuring the sentiment of the US consumer:

Source: Gallop Poll

First of all, who exactly are these people that are satisfied with things now? 7% is 21 million people!

In any case, the last two times that American’s were this unhappy during election time, the results were bad for the incumbent party. Change is a tough proposition for us humans. We much prefer the status quo. But when times are really tough, then we begrudgingly accept the need for change.

I was in Spain (but not in Madrid) when they had their version of 9/11. That tragedy totally changed the outcome of the elections. Before that day the polls were expecting a total crushing defeat for Zapatero but in less than a week it was the opposite.

Getting back to the chart, in 1980 Ronald Reagan defeated Jimmy Carter and in 1992 Bill Clinton defeated George H. Bush. You can already see this reflected in polls which put Obama way ahead of McCain.

Did you watch the third and final US presidential debates? To me it was just a replay of the other two. Each camp tried to score points by following a strategy. Obama by talking about issues and coming across as unflappable. McCain by attacking his opponent and coming across as angry and petulant. Unfortunately the issues matter very little because we aren’t robots but humans.

Without even realizing it, our subconscious makes a choice and we “like” a candidate more than the other. Then our conscious mind scrambles to find a rationale. Believe it or not, that’s how we make choices in life. Scary. But true.

Getting back to this election, did you notice how much McCain blinked? I’m bringing this up not to pick on the poor old man but because the blink rate is actually a very important social cue. And one which is instantly recognized by people even if they aren’t conscious of it as I was with McCain.

In a social setting non-verbal communication is more important than the actual message. McCain was sending a message that he is under stress and of a lower standing in the social hierarchy. This may explain why people see Obama as more “presidential” than him. You know the cliche of a “stare down”? This subconscious cue explains it as well. And this is why women generally blink more, especially when they are trying to attract a mate. Their body language is saying, “I’m docile, I’m gentle, come closer”.

Obama is lucky Gen. Wesley Clark isn’t sitting opposite him because he is a true outlier, with one of the lowest blink rates. If only it wasn’t blinking but winking… You betcha! Gosh Darn it by golly gee willikers (wink)…Palin would already be POTUS.

This is not photoshopped!

What the heck happened to McCain? was he trying to be goofy on purpose?