Betting on McCain?

If you want to forecast the political future, you can look at the polls or you can trade “futures” — effectively place bets — at  A futures trading price in this market represents the percentage chance of an outcome.  For example, the contract on “The US Economy will go into Recession during 2008” is trading 34. (It had traded over 70 less than 2 months ago.)  If the US economy does go into recession in 2008, the contract settles at 100.  If not, it settles at 0.  The contract is worth 10 cents per point, so 100 equals $10 and 34 equals $3.40.  If someone believes the economy will go into recession, he could buy the contract for 34, thus risking $3.40 for the chance to make $6.60 (before commissions.)  Or, if you believe there won’t be a recession, you could sell the contract for 34, risking $6.60 for the chance to make $3.40.  And of course, you don’t have to hold the contract until “expiration.” You could close out your position for a smaller profit or loss before then.

For a few months now, I’ve owned some futures on the GOP to win the presidency. My average purchase price was about 35.5.  After climbing up to a high of about 42 in March, the betting odds for the GOP, i.e. McCain, to win the election have been steadily drifting down and are currently trading just over 36% despite the repeated errors by and damaging revelations about Barack Obama and his associates.

With all the news coverage about Rev. Wright, Father Pfleger, Bill Ayres, and even Michelle Obama, McCain’s chances against Obama should be increasing daily.  But bettors are saying otherwise.

Because nothing focuses the mind like the chance of losing money by getting it wrong, the political market’s reaction over recent weeks reminds us that despite all the news coverage about Obama and the Democrats, Obama the nominee is not the only factor in the race.  There is another candidate: John McCain.

A clue to what the market is saying can be found in how negative about McCain’s chances many conservative writers are. It’s not that they think Obama is a great candidate; he’s been badly wounded and there are grave doubts about him among voters, especially among blue-collar whites in important states. It’s just that McCain may be even weaker than Obama.

Here’s a small sample of conservative thought regarding McCain by contributors to Human Events just in the past few days:

From Robert Novak: “There is probably less enthusiasm for McCain at the grass roots of the Republican Party than we have seen for a Republican nominee (and that includes Bob Dole in 1996).”

From Jennifer Rubin, discussing McCain’s speech in New Orleans: “However, McCain’s forte is not whipping up a crowd and the setting and delivery left even sympathetic observers a bit flat.”

From Bay Buchanan: “John McCain is relevant only in so far as he is not Barack Obama. The Senator from Arizona is incapable of energizing his party, brings no new people to the polls, and has a personality that is best kept under wraps….Since McCain has become the presumptive nominee, I have spoken at more than two dozen Republican gatherings. The sentiment everywhere can best be summarized in the words of one of the activists, ‘No matter who wins in November, we lose.'”

But our president is elected by the Electoral College, not by direct vote of the people. So, the “electoral map” is all important and it would only take a very small change from the 2004 results to saddle us with a Democratic president for at least 4 years.  The betting on some of the swing states’ electoral votes doesn’t offer much solace to Republicans.  Colorado, New Mexico, and Ohio are all trading between 60% and 65% to go Democrat.  Nevada and New Hampshire are essentially toss-ups, with Virginia only slightly under 50% for the Democrats, while Michigan, Pennsylvania, and Wisconsin all remain over 70% to go Blue.

This is truly scary stuff for the GOP, particularly if a lack of enthusiasm for McCain in some quarters translates into disastrous losses in the House and Senate.

The Democrats currently hold 49 seats in the Senate, but exercise control because two Independents (Sanders and Lieberman) caucus with the Dems. On, the odds of the Democrats having between 56-60 seats not counting the two independents is trading around 41%, and the odds of having 61-65 seats about 12%.  In other words, bettors are saying that there is more than a 50% chance of the Democrats picking up at least 7 Senate seats.  Adding in the two Independents, that’s a greater than 50% chance of the Democrats having between 58 and 67 seats in the Senate, with 60 being a filibuster- and veto-proof majority.  Given the presence of RINOs like Olympia Snowe, Susan Collins, and George Voinovich, even the lower end of that range could effectively be filibuster-proof.  This means that it will not be possible to stop the approval of an Obama nominee, no matter how terrible, to the Supreme Court. It also means the Senate would likely over-ride any McCain veto of a tax hike.

You can see further evidence of these predictions in the betting odds on some competitive Senate races:  In New Mexico’s race to replace retiring Senator Pete Domenici, the Democrat is trading 70%. In Minnesota, incumbent Norm Coleman is trading an unsafe 55% against leftist tax-evader Al Franken. In New Hampshire, incumbent John Sununu is trading only 32%. And here in Colorado, Republican former Congressman Bob Schaffer is trading below 40% although polls show the race closer than that.

Similarly, there are currently 233 Democrats in the House (out of a total of 435 seats). Looking at the “mid-market price”, the average between the bid and the offer for each contract, bettors are giving a more than 70% chance for the Democrats to pick up at least 8 seats, and over a 40% chance to pick up at least 18 seats, giving them 251 or more.  While a veto-proof majority in the House is 290, given the large number of liberal (or just spineless) Republicans in Congress, one can not be comfortable that 251 is not effectively a veto-proof majority for the Democrats on most issues. 

The other interesting area of betting is on who will be each party’s Vice-Presidential nominee.  Among Republicans, the top three are Mitt Romney at about 20%, Minnesota Gov. Tim Pawlenty at 16%, and Mike Huckabee at 13%.  Senator Kay Bailey Hutchison, Rudy Giuliani, and Condi Rice are all trading around 3%-4.5%.  I think it will be none of the currently-listed possibilities. Apparently, bettors agree, as the “Field” (everyone not listed) is trading over 40%.

More interesting is the Democratic VP betting, where Hillary is trading around 18%, down from a brief high of over 30% on June 4th.  Jim Webb is a narrow favorite for VP, trading around 19%, followed by Mark Warner at about 10%, Bill Richardson at about 7%, and Al Gore, Ted Strickland, Joe Biden, John Edwards, Wesley Clark, and Sam Nunn bringing in from 5% down to 3%. Evan Bayh, who was the odds leader for several months at the end of 2007, is down to 2.5%.  The “Field” is trading around 30%.  I think it will be Webb or Richardson, and that Gore is a great sale.

Although Hillary has announced that she’s suspending her campaign, she is still trading around 5% to be the Democrat’s nominee for President. I wonder whether bettors believe that some exceptionally damaging revelations about Obama will cause super-delegates to reconsider or if they are considering the implications of, as Hillary suggested in an interview just two weeks ago when asked why she wasn’t out of the race, “We all remember Bobby Kennedy was assassinated in June in California….”

People make trades and bets for all kinds of reasons.  They’re not always reasonable, but they’re always worth considering briefly simply to understand the market.  In recent years, it’s seemed that more mass participation in this sort of gambling has decreased rather than increased the accuracy of the prediction that the futures market represents.

Perhaps new participants are betting with their hearts rather than their brains, much like the large numbers of new participants in caucuses…the reason Obama is where he is. Still, if I were the Republican leadership, today’s odds would make me very uncomfortable indeed.