Polls, Pundits Tout GOP Gloom, But Smart Money Bets Different

In handicapping the midterm elections, conventional wisdom and the smart money seem to have parted ways in recent weeks.

If you happened to catch "The Chris Matthews Show" on NBC on Sunday, you would've learned that 11 of his 12 panelists expect the Democrats to capture the House.

But those who put money behind their predictions see things differently. Quotes at TradeSports.com show that futures traders favor Republicans to retain control of the House.

Late Tuesday, tradesports' futures contract for GOP House control was trading at 53.8 — a 53.8% chance. Tradesports gives an 80.3% chance that Republicans will hold onto the Senate.

Betting exchanges, or futures markets, are worth paying attention to because they have a track record that would put most pundits to shame.

In 2004 the Iowa Electronic Markets, a research vehicle operated by the University of Iowa, gave President Bush a 51.4% chance of winning re-election vs. a 48.6% chance for a Sen. John Kerry victory. Those totals were eerily close to the popular vote results.

The prediction markets tend to do better than polls because they are able to capture "the wisdom of crowds" and consider questions a pollster wouldn't think to ask, said Don Luskin, chief investment officer at TrendMacrolytics.

When real money is at stake, those making predictions are more likely to integrate and weigh all the evidence.

This generates "a holistic view" that isn't skewed by personal bias, he said.

Republicans shouldn't be breathing easily, however. Luskin figures the markets will have much better predictive power closer to Nov. 7. He notes current readings basically signal a 50-50 contest.

What's noteworthy is that these markets suggest Republicans have revived from "a near-death experience," Luskin said. In early September, the markets gave Republicans only about a 40% chance of holding the House.

Have futures traders spotted a shift in the electoral winds more quickly than polls or pundits?

It wouldn't be the first time. In a 2005 paper, University of North Carolina professors Paul Rhode and Koleman Strumpf wrote that the TradeSports market "appears to quickly incorporate new information."

They noted that Bush's market shares fell five points during a 2004 Bush-Kerry debate that pundits later said Kerry won.

Subsequent polls showed a Kerry bounce. Pundits who had seen Bush as the favorite began to see the race as a dead heat.

Futures traders now are likely responding to a sharp drop in energy prices, Luskin said, as well as a movement in Congress on earmark reform. That should lead to a less hostile climate for GOP candidates.

Retail gasoline prices have fallen 54.1 cents in six weeks to a six-month low of $2.497 a gallon. They'll probably fall an additional 30 cents or so in the coming weeks.

Other key developments include Bush's national address on the fifth anniversary of 9/11 and House action on border security.

Some polls are beginning to back up the notion that the election outlook has shifted. On Tuesday, a new USA Today/Gallup poll showed Bush with a 44% approval rating, up from 39% in August.

The poll also showed that 48% of likely voters would vote Democratic and 48% would vote Republican. Other recent polls give Democrats a 3% to 14% advantage.

Professional prognosticators — who have their reputations on the line — give Democrats the edge. Democrats need 15 seats to retake the House; the Rothenberg Political Report predicts a pickup of 15 to 20 seats.

Source+Picture: investors.com