Intrade Predictions: Rate Cut, Hillary, Guiliani

The prediction market at Intrade is currently predicting another fed rate cut at the December 11th meeting of the Federal Open Market Committee:

Intrade is also still predicting that Hillary Clinton (71%) will face Rudy Guiliani (45%) in the presidential election . . . and win (49%-18%):


The only thing that scares me about these contracts on InTrade is that due to relatively thin trading their exists the possibility that these results could be manipulated by an overzealous campaign. The value of manipulating these numbers is very clear. Just go to Google News and type in Hillary and the word Intrade. You will find literally hundreds of articles from newspapers around the country referencing these figures. The value of that kind of PR could be huge for a campaign with an extra couple hundred thousand dollars in their coffers.

There are already some rumors circulating that Obama's poor performance on Intrade is due to an as yet undiscovered scandal.

A Post Rate Cut World

Here are the key issues I am following after the Fed Rate cut earlier this week:

• Dollar Devaluation: The US Dollar has taken a big hit on the back of the 50bp FF rate cut on Tuesday. For the first time in 30 years the loonie (Canadian Dollar) reached parity with the USD. The Euro broke through the key psychological level of $1.40 as it continues to rally against the dollar. The trade weighted dollar index dropped 1% to 78.5. Here are some other highlights from the dollar devaluation:
• Saudi Arabia: SAMA, Saudi Arabia's monetary agency, took no action after the Fed rate cut signaling that it might be considering dropping its peg to the US dollar. While this alone wouldn't crush the dollar there are concerns that sentiment is slowly switching among central bankers the world over how tied they want to be to a slowing US economy.
• Greenspan: Alan Greenspan has been hogging the spotlight with the release of his new book and his prognostications on the economy. According to Alan the odds of a recession are "somewhat more" than 1 and 3 even after the Fed rate cut. Alan also appeared
  on the Daily Show on the same day the Fed cut rates . . it yielded quite an interesting interview.
• 
  
• Commercial Paper: Many market participants have been tracking the commercial paper market to gauge the health of the credit markets in general. We have had 5 straight weeks of declines in commercial paper outstanding for a total decline of roughly 16%. The decline has been led by asset backed commercial paper (ABCP). After the declines slowed the past few weeks they picked up this week though the cause of the shift is largely due to a decline in supply instead of a decline in demand.
• Financials: In the face of strong headwinds Goldman Sachs put together a strong quarter, with a 79% surge in net income. Goldman is now the only major bank that is in the black on the year, up almost 3% on the year. Bear Stearns didn't fare quite so well, watching its net drop 61%. Its stock is off almost 30% on the year.
• GSE Portfolio Caps: President Bush and OFHEO reversed tack and allowed Fannie and Freddie to raise their loan capacity by 2% for a total increase of $34 billion. The change should help relieve some pressure on the mortgage market but isn't a quick fix.
  
• Middle East Sovereign Wealth Funds: Dubai purchased a stake in OMX and Nasdaq. Qatar purchased a 20% stake in the LSE. Abu Dhabi purchased a $1.75 billion stake in the management company of private equity firm Carlyle.
• Rally in the AAA ABX Indices: After briefly being down over 10% on the year the AAA ABX index has rebounded nicely off of its yearly lows.
  
• Stabilization in the BBB Rated ABX Indices: The BBB rated indices are still trading down 70% this year but look steady at current levels.
• Barack Obama's Rough August: Jim Simons and Mark Carhart aren't the only ones who had a tough start to August this year. If you track Barack Obama's likelihood to be the Democratic nominee for President on InTrade you may have noticed the Barack Obama had a rough start to August this year, falling from a virtual dead heat with Hillary Clinton into a distant second place.

Presidential (Un)Popularity and the Electronic Futures Markets

President George W. Bush's approval rating has been under 40% for quite some time now. This is not a good sign for Bush or for the Republican's in the next election. However, if you look at all the Presidents since Truman, each one -- with the notable exception of Dwight Eisenhower -- has spent at least part of their term with a rating near 40%. The one thing that is interesting about W however is the fact that since 9/11 he has been on a very steady downward slide. Thank you to the Wall Street Journal for the interesting analysis. (Hat Tip: Barry Ritholtz) Click the photo to enlarge.So who is lining up to replace W? For the Donkeys Hillary Clinton and Barack Obama are in a dead heat on InTrade, the political futures trading website:

For the Elephants it looks like Rudy Giuliani and late entrant Fred Thompson are racing neck in neck:

Is Fred Thompson Our Next President?

Actor and former Tennessee Senator Fred Thompson hasn't yet announced his campaign for President, but that hasn't stopped him from quickly becoming the early Republican leader in the InTrade prediction markets. In just three months of trading he has passed McCain, Romney and Guiliani in rapid succession:


You can see his rise has been fairly steady and received quite a boost after asking to be released from Law & Order in May and forming an "exploratory committee" in June:


To be perfectly honest I don't know much about Fred's economic policies, though from a quick glance at his blog it looks like he is strong fiscal conservative. All I knew about him before that little bit of research was his stellar performance as Jim Robinson in the "Barbarians at the Gate" made for TV movie . . . but I digress . . .

Prediction Markets and Election 2008

The ability of markets to process large volumes of pricing information is indisputable. So while polling is still the method of choice for predicting voter behavior, prediction markets, by letting voters put their money where their mouth is, may be a more efficient and continuous means of predicting our next president. With that in mind I scoured the existing prediction markets that allow real money trading -- Iowa Electronic Markets and InTrade -- as well as those that only use play money -- News Futures and Prediction Xchange (currently offline) -- for information on who our next president will be.

In case you are wondering I feel that InTrade is perhaps the best prediction market site because of its easy navigation and advanced graphing capabilities. I am not endorsing that you engage in betting on any of these sites, and if you want to learn more about the potential legal consequences of doing so you should check out this article from Slate.

The electronic prediction markets pose a question, for example "Will Hillary Clinton be the 2008 Democratic Nominee for President?" If Hillary wins the contract is worth $100, if she loses it is worth $0. So logically the more likely she is to win the more someone will pay for the contract and the higher the contract will be worth. Let's start with the real money sites:

1. Iowa Electronic Markets (IEM) - IEM is predicting Hillary Clinton will be our next President. More money is riding on a Democratic victory 53.3 over a Republican victory 46. The candidate voting has had an interesting month. On the democratic side Hillary Clinton 40.8 and Barack Obama 40.5 opened the month in a dead heat, with Edwards 7.7 a distant third. The catch all for other candidates was at 12. By the end of April Hillary bumped up to 43.9, Barack fell to 32.4, Edwards is at 9 and the others are at 15. Why is Barack falling and others rising? Is the call for an Al Gore candidacy stealing votes from Obama?
   
2. InTrade - InTrade is predicing Hillary Clinton will be our next president. Hillary Clinton has a wide margin over Obama. The current bid price for Hillary is 47 versus 30.5 for Obama. The third candidate is actually Al Gore with 10.5 over John Edwards with 7.2. According to InTrade Al Gore is still a very strong dark horse candidate. This may help us understand the IEM data better. The one weakness of the IEM market is that lack of a separate trade for Al Gore, who is lumped in with all the other Democratic candidates.
   
3. NewsFutures - NewsFutures is predicting Barack Obama will be our next president. Currently Barack Obama is the 46% favorite to be the 2008 Democratic Nominee for President. Hillary Clinton is a close second at 43%. Republicans are dogs (44) to the Democrats (56) in the general election.

So what have we learned? All the sites are predicting a Democratic victory and the two that trade real money are predicting a Hillary Clinton general election victory. It is however up to you how realistic you think this is. If you have information that leads you to believe that there has been a mispricing I encourage you to put money on it.

In the meantime those chartists out there can digest this chart for Barack Obama from InTrade. It looks solid to me as Barack is still way out in front of his moving averages but he may have some resistance in the low 30's.
Here to is the chart for Rudy Guiliani. You can see that Rudy was up on strong volume in February and March but had trouble breaking 40. He is still the leading Republican candidate.

Barack Obama's Economic Team

Barack Obama is a legitimate presidential candidate. If this wasn't clear before, it was certainly clear after he announced he had raised $25 million in campaign contributions, putting him just $1 million behind seasoned fundraiser Hillary Clinton. Having the support of hedge fund legends George Soros and Paul Tudor Jones certainly hasn't hurt either. But, until recently Obama hasn't revealed much about his economic policies. To be perfectly honest his entire domestic policy agenda is largely unknown. Even a thorough analysis of speeches, interviews and his congressional voting record reveals very little substance (some information can be obtained from his website.) I feel the Wall Street Journal described it best when they said he is best known for "his biography, his charisma and his early opposition to the Iraq war."

In his defense, Obama's fundraising ability and charisma has meant that he hasn't had to take strong policy positions thus far, and this will undoubtedly work in his favor as he surveys his opposition and his voter base and develops policies that could place him in the oval office. For now, one of the only ways we can evaluate where Obama will land on the political spectrum is to evaluate the economists he has added to his team. Atop his economic team are star Chicago Economist Austan Goolsbee and two Harvard professors who served on Bill Clinton's economic team, Jeff Liebman and David Cutler. At first blush this is an accomplished and experienced team. Because health care is such an important Democratic issue it is not surprising that Obama will lean heavily on Cutler. Cutler's outstanding research background and his political experience make him a crucial part of a team that will have to come up with a health plan that, as Obama pledged, will "have all individuals covered by the end of his first term." Expect more information on Obama's policies to emerge in the weeks ahead. The first Democratic debate is this Thursday evening.

Below is more detail on the team (click to enlarge):

"Seeking Clues to Obamanomics"
Deborah Solomon
Wall Street Journal, Tuesday April 24th