Fulton Associates

Saturday, October 27, 2012

US Election & Prediction Markets

How the heck is everyone?!!?
I've been busy with our first born Sasha; just adding a pic here for posterity.
As the other members know, politics and financial economics are a couple of my favorite topics; so the US presidential elections are always a fun time for me. There are way too many polls, state polls, and aggregate "poll of polls" to figure out who's going to win (and how to make money off this prediction), so I rely on efficient markets and the self serving greed of human nature to get the most accurate info; namely Intrade Prediction Markets!
Although most national polls are suggesting a dead heat or even slight Romney lead, the US electoral college is a winner take all system in each state so it turns out Obama has a better breakdown of votes in the key "battleground states". So according to link above, the efficient prediction markets today are predicting a 63% likelihood of Obama winning. Just to be clear, the prediction is just that he will get to 270+ electoral college votes, and not take 63% of the popular vote.
Interesting thing is, when you look at the battle ground states (at this link), there's only four states which are "in play". Let's arbitrarily say anything above 65% is a given to the leading candidate. (electoral college votes in parenthesis).
Ohio (18 votes) is leaning 62% to Obama
New Hampshire (4 votes) is leaning 58% to Obama
Virginia (13 votes) is leaning 57% to Romney
Colorado (9 votes) is leaning 51% to Romney

Without the above states, Obama is at 259 EC votes and Romney is at 235 votes. Romney needs Ohio, VA and one of NH or CO. Obama can conceivably win without Ohio by taking NH and CO to get to 272 EC votes. That would be a really exciting election night if Obama loses Ohio, wins NH, with the CO election results coming in late at Mountain time. Obama wants to avoid that nail-biter scenario, so they really want Ohio and the 18 votes. In fact, I read the ground game is so intense in Ohio, it's come down to two counties and several suburbs in those counties to try to get out those votes.
As it currently stands, if we play the odds, as we always do in the markets, it looks like a Obama win and we stick with the status quo. If somehow, over the next week Romney manages to make gains in Ohio, looks for the markets to adjust accordingly. I'm thinking certain sectors like Healthcare, Defence, Energy and maybe even Financials might uptick based on the perception of a less regulatory environment.
OK, baby is crying so that's my thoughts for now.