Tuesday, September 28, 2010

Are the Experts Grossly Underestimating the Republican Tide?

In a nutshell, the answer appears to be yes, but allow me to explain.  When the collective punditry looks at an upcoming election, they have two resources: polls and election forecasting services like the Cook Political Report. (A third should be prediction markets like Intrade, but not many pay as much attention to those as I do.)

Let's examine both of these information sources, polls first. All polls sample either "registered" voters or "likely" voters, but there's a big difference between the two, particularly in midterm elections. The average turnout for the last five midterms has been 37%, and it hasn't been above 40 since 1970. Generally, pollsters only sample registered voters when elections are far off, but not always. For instance, there was a Siena registered voter poll last week in New York that showed Andrew Cuomo up by 33 points. At this point, that's number is utterly meaningless for the simple reason that Democrats are less reliable voters than Republicans. A Quinnipiac poll of likely voters done at the same time showed Cuomo only up by 6.

So, then, how accurate are polls of "likely" voters? First, you need to know how they're done. Voters are generally asked if they've voted in the last couple of elections and if they intend to vote in this one. There are some problems with this. First, it assumes someone is telling the truth. No doubt many are embarrassed to admit they haven't voted in the past and just lie about it. And who says ahead of time they're not planning on voting in an election that hasn't happened yet?

Obama was elected by a wave of voters who were, in many cases, people for whom the inside of a voting booth was a new experience. It took what they viewed as a highly inspirational candidate and a high degree of social excitement to get them there. Many of these voters are either not engaged right now, or are fully dispirited, and will likely not show up on November 2nd. And yet, they could truthfully answer affirmatively as to whether they had voted recently. They might also reflexively answer yes as to their intentions on election day, but then find themselves far too busy when the day comes.

On the other hand, many Republicans were utterly exhausted by the end of Bush's years, and just as many were uninspired by McCain. They too found themselves too busy to bother voting, and therefore would be dismissed by pollsters, per their models, as unlikely voters this time. Wrong! These are precisely the demographic that will turn out in droves. They are counting the days until November 2nd.  1994, the last Republican wave, doesn't hold a candle to how fired up people are this time.

My view is that any Republican within 5 points in likely voter poll near election day will win.

Now let's talk about Charlie Cook and his highly respected Cook Political Report (http://www.cookpolitical.com/). Right now, he sees the Republicans picking up about 40 House seats, or one more than they need to assume control. But when you really drill down, this seems quite low. There are many districts that Cook rates a "toss up" that just ain't. Pennsylvania's 8th is a good example. The latest poll has the Republican up by 14 points. How is that a toss-up? The Democrat, Pat Murphy, only gets 35%, and he's an incumbent!

New Hampshire's 1st district is another toss-up, but the latest polls there have the Republican challenger up by ten points. That means, if my theory on turnout is correct, the Republican will win by 15.
Or take my home district, New York's 19th. John Hall, the incumbent Democrat, is the former lead guitarist of the band Orleans. Remember You're Still the One? - great song. He's hirsute, moist looking guy in the middle. (This picture has appeared in my letters before - I just can't help myself.)

The 19th is, by registration, marginally Republican, and yet Hall has voted for every new Obama/Pelosi initiative. This has put him in a deeply troubled position against a formidable opponent, a Princeton-educated ophthalmologist named Nan Hayworth. The latest poll has Hall up 44-42, but let me clue you in to a little Polling 101: any incumbent below 50% near election day is in deep trouble, even if they have the lead. It means that most voters have decided to vote for the other guy, they just don't know who he (in this case she) is yet. In the 19th, Hayworth's name recognition is only at 50%, which means she has lots of upside, which Hall doesn't. Plus, if you factor in the likely turn out differential, I'd say Hayworth wins by 6-8 points, maybe more. And yet...Cook has the race as a "Lean Democrat."

(Amusing sidebar: Hall's lawn signs say "Elect John Hall." Notice why that's funny? They don't say, "re-elect.")

That's just three out of many examples, which suggests the question, what is Charlie Cook thinking? He's no dummy. To answer this, ask yourself what you would do if I asked you to spend some time building an mathematical election model. Well, your starting point would be to figure out what factors have successfully predicted election outcomes in the past. You would run correlations with various things, not unlike the process for developing quant trading models.

All right class, see if you can guess the single biggest factor, one with over a 90% correlation. Anyone? You, in the back, with pocket protector. What's that? Incumbency? Correct! You get an A.

The fact is, incumbency would have to dominate any quant election model. But this year, that's precisely the wrong factor to be leaning on in any but the most gerrymandered districts. Witness Mr. Hall's lawn signs.
My guess is that Cook relies on a combination of modeling and polls. As I hope I've demonstrated, both are highly flawed this cycle, and in fact are probably poor indicators in most wave elections. I'd say the Republicans pick up 50-60 seats this year. As for the Senate, here are the latest polls in Democrat seats that the Republicans hope to win:

Republicans are currently up in nine of these races. If you factor in my five-point rule they are up in twelve and tied in one.  Since these races are likely to be highly correlated, things still look quite good for the GOP, even if Delaware has slipped from one end of the spectrum to the other. They need a net pick-up of ten. (Note: there are no seats currently held by the GOP that appear to be in danger.)

For what it's worth, I believe we may see a nice equity market rally between now and November while these realities dawn on people. I'd probably then sell on election day.

Saturday, September 25, 2010

Tuesday, September 7, 2010

Senate Election Preview

I know everyone's talking about the House, and I will get to that later, but the Senate has quietly become very interesting, and if I had to call it now, I'd say the Republicans will win it back. They need to gain 10 seats, and here's how things look right now:

Arkansas, Indiana, and North Dakota: stick a fork in them, they're done. The Republican in Arkansas is up by an unbelievable 38 points. Net gain of 3 seats.

After this, the Republicans must win seven of the following seats. They are listed in order of GOP strength, and the numbers after each show the latest poll.

Delaware           48-37    up 11
Pennsylvania     47-37    up 10
Washington       52-45     up 7
Colorado            49-45     up 4
California          48-47     up 1
Wisconsin          47-46     up 1
Illinois               45-45       tie
Nevada              44-45   down 1
West Virginia     42-48   down 6
Connecticut       40-47   down 7
New York           32-51  down 19

A few points:
  • I believe polls are underestimating Republican turnout, perhaps dramatically (some polls don't even determine whether someone is likely to vote). Three million more Republicans have turned out to vote in primaries this year. In 2006, three million more Dems voted. Six million is a GIANT swing, and the differential is the largest in 80 years. The "enthusiasm gap," measured by pollsters, is running on the order of 25 points, a level never seen before. Any Republican inside of 5 points on election day should win. By that metric, the Republicans pick up 11 seats (maybe even 12, as the West Virginia poll is quite stale, and that race has been trending towards the GOP).
  • Every possible thing is going right for the Republicans, politically, and it's difficult to see how that will change before November. Virtually every one of these polls has been trending GOP. Look for the usual October Surprise from the Dems, though (remember Bush's DUI?).
  • The results will be highly correlated. In other words, Republicans will do well as a group, or they won't. This will likely work in their favor. There are four seats that the GOP holds that the Dems are thought to have a fighting chance at (Alaska, Florida, Missouri, Ohio), but the closest the Dems are on any of these is 6 points (Alaska, Ohio). If this is really a "wave" year, none of these will be close.
  • While Harry Reid in Nevada is winning by a point, he is only at 45%, well below the all-important 50% number for incumbents. That means that 5% of Nevadans have decided to vote against him, they just haven't figured out who the other guy is yet (in this case, woman).
  • Connecticut is thought to be safe for the Dems, but I don't think so. Polls have been closing and the Republican, McMahon, has deep pockets. Also, financial reform is unpopular in Fairfield County, which is where all the money comes from.
  • New York may be a stretch, but Gillibrand isn't particularly popular, and she's barely above 50%. Further, the Republican challenger isn't even known yet. Look for this race to close after the Republican primary on the 14th.
Intrade currently has the odds of a GOP Senate takeover at 28%. I would put it at 55%.

I Just Want to Bang On the Drum All Day

Two million French citizens are taking to the streets today to protest - get this - not getting Social Security until age 62. Currently, they get to retire at 60, a practice which is bleeding the country dry. But the unions say it is a "cherished social tradition." I'm thinking of telling my partners that taking a two hour nap every day is something I cherish, too.

Some math here: let's say the average French citizen enters the workforce at age 25 (after school, maybe some grad school, and some general hanging-around-the-cafes-spouting-Rousseau time). They then work until age 60, and retire. If they live until 80, that means they have worked a mere 35 out of 80 years, and yet they expect others to support them for the 45 they don't work. I'd cherish that, too.

But let's not stop there. The French only work a government-mandated 35 hours a week, and they get 6 weeks vacation. That means in a given year they work 1,610 hours out of a total of 8,760, or 18% of the total time. Over the course of their lives, they work 56,350 out of 700,800 total hours, or 8% of the time.

They must really be productive when you catch them at work.