Tuesday 31st August 2004

My thanks to Eoin Treacy for deputising so competently in writing Comment of the Day and recording the Subscriber’s Audio during most of August. He is now diving with sharks and other cuddly creatures off the coast of Costa Rica until 15th September. As if there weren’t enough of the former critters in the markets.

Thanks also to subscribers for supporting Eoin with your reports, articles and comments. This is very much in the spirit of Fullermoney’s Empowerment Through Knowledge theme.

Cycling without a laptop, I had no access to this site during August but being a current events junkie, I picked up newspapers most days, when civilization would allow. Of course nothing can beat a review of the price charts, for keeping one in the picture, not to mention objective.

I’ll be looking at even more graphs than usual over the next few days. However my initial impression is that not much of what has occurred over the last 30 days represents a surprise for subscribers. Nevertheless, there are some potentially interesting developments which merit discussion. I’ll provide my initial thoughts on these in tonight’s Subscriber’s Audio.

Bush Will Win, Economic Models say: Iraq, Bin Laden May Muddle Predictions - Here’s the opening of an interesting story from Bloomberg:

Aug. 31 (Bloomberg) -- President George W. Bush will win four more years in the White House under formulas devised by professors to predict the outcome of U.S. presidential elections. It may not be that simple an equation.

Eight forecasting models are unanimous in predicting Bush will defeat Democrat John Kerry with as much as 57.5 percent of the vote. The models are based on measures including economic-growth projections and opinion polls. Economist Ray Fair of Yale University says his model correctly accounts for the popular vote in 19 of the past 22 elections.

Even so, forecasters such as political scientist James Campbell say the hunt for terrorist Osama bin Laden and discontent with the war in Iraq are among wild cards that may muddle the modeling. Many forecasts are at odds with polls showing Kerry, 60, running even with Bush, 58. The Standard & Poor’s 500 Index, down about 1.4 percent this year, isn’t providing Bush with an election-year boost either.

``Idiosyncratic events, things that can’t possibly be anticipated, might be more likely to occur during this campaign,’’ says Campbell, 52, who teaches at the University of Buffalo in New York. ``If they capture bin Laden, or if things take a turn for the worse in Iraq, those are things none of the models can anticipate.’’

My view - Only a month ago, most political pundits concluded that the US President’s re-election campaign was in trouble. I concurred with that view, mainly because Americans seemed tired of the war due to its cost in blood and treasure, and also reputation in the eyes of some. Additionally, resentment over the exceptionally close and contested election result in 2000 made Bush’s opponents more zealous than his supporters.

This latter advantage for Kerry has been partially eroded by an increasingly vocal and organized minority - the so-called Swift Boat Veterans. They are incensed by Kerry’s campaign as a Viet Nam War hero, feeling that he denigrated the courage, integrity and sacrifice of other veterans with his Congressional testimony on return from that bitter conflict in US history.

Is this an own goal by Kerry or dirty tactics by the Bush team? A bit of both, I suspect, in what may be remembered as the dirtiest campaign, on both sides, in US history. However the Democrat challenger and his advisors should have anticipated the risks in trying to out macho the president.

Have they "misunderestimated" Bush, to use the President’s own contribution to the English language? Mark Steyn had some interesting observations on this in The Sunday Telegraph:

At the beginning of the year, Thomas Lifson, who was at Harvard Business School with George W Bush, made an interesting observation about the President. He notes that young George "was a very avid and skillful poker player" when he was a Business Administration student and that "one of the secrets of a successful poker player is to encourage your opponent to bet a lot of chips on a losing hand. This is a pattern of behavior one sees repeatedly in George W Bush’s political career".

Indeed one does. In the months following Mr Lifson’s observation, the President sat back, as John Kerry’s consultants, the Iowa caucus voters, the Democratic Party at large, and the media convinced themselves that the one card that trumps Bush’s leadership in the war on terror was Kerry’s four months in Vietnam, and bet everything on it. They have just lost that hand.

Kerry is in seclusion, unable to expose himself to any but the most sycophantic interviewers, and getting whumped by hundreds upon hundreds of fellow Swift boat veterans, plus former POWs, plus retired admirals, over every aspect of his brief stay in the Mekong Delta.

The Senator put his money on the wrong war. After a couple of entertaining weeks of the aggrieved Swiftees driving down his poll numbers in battleground states, it seems a shame to interrupt the implosion of the Kerry campaign for the Republican convention. But I’m sure the seared Senator is grateful for the intermission, and for the rest of us the next week affords a rare opportunity in this election campaign to catch up with the issues of the current millennium before the inept Kerry resumes bogging us down in his personal Vietnam quagmire again.

Does any of this matter for the markets? Yes, according to a century of stock market election year history, which you can see in this graph by Ned Davis, reproduced in The Week. The US stock market faces a stiff headwind from the secular bear trend that I have often discussed, but it will do better (or less badly) if Bush rather than Kerry leads the polls between now and November’s election.


I still think it is Kerry’s election to lose.

Christopher Wood’s GREED & fear: Argy sans bargy - The popular CLSA strategist makes some interesting points in this latest edition, written in Singapore. Here is the opening paragraph:

Wall Street has of late rallied back into its trading range of recent months. Talk of a break down to the downside has for now been put on hold while hopes are again, naturally, rising of a break out to the upside. As the financial markets head out of the holiday season into the autumn the chances grow of a decisive break one way or another. Still for now the remarkable feature of 2004 is the lack of volatility in the major stock market averages. The S&P500 is seeing the narrowest trading range since 1994 (see Figure 1). The foreign exchange markets have also been dull with the major action being in the bond market. Even then, the 10-year Treasury bond yield began the year at 4.25% and is now only 4.26%. Still a lot of blood and guts has been spewed by leveraged bond investors in the intervening period. Deflationists were blown up in the inflation scare of the second quarter. But bond bears were then caught out by the unexpected slowdown in economic momentum which has occurred so far this quarter.

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