Mid-Term Election Outlook & 2011 Policy Implications

October 2010Daniel Clifton

dclifton@strategasrp.com

The Recession Election

• 3rd Straight Election Voters Will Throw Out Incumbents

• Elections Have Not Been This Volatile Since Late 1940’s/Early 1950’s.

• Independent Voters Don’t Believe Either Party Is Equipped To Provide Growth

• Divided Govt Is Last Shot Before 3rd Party Challenge

Historic Convergence of Political Party Identification

Macro Indicators Pointing To A Wave Election

• Macro Data Points To A Wave Election In Which Macro, Not Local Issues

• Obama Approval Rating, Generic Ballot, Right Track/Wrong Track Are Upside Down For Democrats

• Republicans Energized, Independents Breaking Republican 60-40, Democrats Demoralized

• Intrade Odds Place GOP Takeover of the House At 90 Pct and Senate At 25 Pct

• Bottom Up Intrade – GOP Picks Up 55 House Seats & 8 Senate Seats

Micro Data Beginning To Catch Up To Macro Data

• 50+ Dems Behind In The Polls, Just 25 GOP Members At This Time In 2006

• Traditional Battleground States Are Comfortable GOP, Lean Dem Areas Are Now Tossups

• Handicappers Placing 99 Districts In House At Risk

• GOP Senate Takeover Being Underestimated

2nd Highest Unemployment Rate For A Post WWII Election

US Unemployment Rate, Annual Avg, Pct

0

2

4

6

8

10

12

'48 '55 '62 '69 '76 '83 '90 '97 '04

Consumer Confidence Remains Depressed

Consumer Confidence & Unemployment Rate

0

20

40

60

80

100

120

140

160

'83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09

2

3

4

5

6

7

8

9

10

11

Unemployment Rate, Right, Inverted

Consumer Confidence, Left

'94 Election

'06 Election

Economy Remains Democrats Achilles Heal

Approval of Obama's Handling of Economy (Washington Post, 9/2)

30

35

40

45

50

55

60

65

Feb-09 Aug-09 Feb-10 Aug-10

Disapprove: 57%

Approve: 41%

Voters Giving Little Credit To $1 Trillion Stimulus Program

• A majority of voters oppose the stimulus as they have not felt a direct benefit from the program. This is the conclusion of a Democratic focus group during the State of the Union.

Voters Aren’t Buying ItWhen President Obama took credit for bringing the economy back from the ledge or pointed to macro-level indications of economic growth, voters turned their dials down.

National Journal, 2/6/10

Anti-Incumbent EnvironmentMembers of Congress Deserve Re-Election

(Gallup, 10/21)

38 39

33

57

45

50

56

29

0

10

20

30

40

50

60

'94 '06 '10 '02

Yes

No

Wave Election: Step 1Presidential Approval Drops

Approval Correlated With Lost House Seats

Presidential Approval Rating & Loss of House Seats In Midterm Election

-60

-50

-40

-30

-20

-10

0

10

30% 40% 50% 60% 70%

Presidential Approval Rating

# of House Seats Lost

Wave Election: Step 2Generic Ballot Switch Parties

Generic Ballot Pointing To Significant Dem Losses

Gallup’s Plug & Chug Generic Ballot Model

Gallup Historic Generic Ballot Seat Forecast

Dem Vote Share

Mid-Range Dem

Low-Range Dem

High-Range Dem

60% 348 337 359 59% 337 326 348 58% 326 315 337 57% 316 305 327 56% 305 294 316 55% 294 283 305 54% 283 272 294 53% 272 261 283 52% 262 251 273 51% 251 240 262 50% 240 229 251 49% 229 218 240 48% 218 207 229 47% 208 197 219 46% 197 186 208 45% 186 175 197

Wave Election: Step 3Dem Enthusiasm Wanes

High Level of Interest in Elections (NBC/WSJ Polls)

0

10

20

30

40

50

60

70

80

90

18-34 yearolds

Liberals ObamaVoters

Blacks All Voters Republicans

2008

2010

Intrade: Near 90% Chance GOP Takes Over The House

Intrade Odds: GOP Control of House After 2010 Elections

0

10

20

30

40

50

60

70

80

90

100

11/ 26 2/ 26 5/ 26 8/ 26 11/ 26 2/ 26 5/ 26 8/ 26

Intrade Suggests GOP Takes 55 Seats

Intrade Odds: GOP to Gain 55 House Seats

10

20

30

40

50

60

70

8/ 1 8/ 15 8/ 29 9/ 12 9/ 26 10/ 1

Placing The Consensus ViewIn Historical Context

# of Seats Gained By A Political Party In House Elections

0

10

20

30

40

50

60

70

80

'46 '54 '62 '70 '78 '86 '94 '02 '10

Intrade Odds For 55 Seats Is A Large Pickup By Historical Standards

Senate Odds: Very Low Probability of GOP Takeover

Intrade Odds: GOP Control of Senate After 2010 Elections

0

10

20

30

40

50

60

70

80

90

11/ 9 2/ 9 5/ 9 8/ 9 11/ 9 2/ 9 5/ 9 8/ 9

Intrade Odds Saying Dems Lose 8 Seats But Hold The Senate

Intrade Odds: # of GOP Senate Seats (10/21/10)

0

10

20

30

40

50

60

70

80

90

100

41 42 43 44 45 46 47 48 49 50 51

7 Seats

10 Senate Seat Pickups Rarely Occurs In One Election

# of Seats Gains By A Political Party In Senate Elections

0

2

4

6

8

10

12

14

'46 '54 '62 '70 '78 '86 '94 '02 '10

Intrade Odds For 7 Senate Seats Is Large

But For 10 Seats Woud Very Large By

Historical Standards

70 Pct Rule Would Suggest Senate Takeover Is Possible

The 70 Pct Rule For Wave Elections

0

10

20

30

40

50

60

70

80

90

100

'06 '08 '10

House Seats In Play

Net House Seats Won

'06 = 64% '08 = 72% '10 @ 68% = 56 Seats

Market Has Begun Pricing In The Election

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

97

98

99

100

101

102

Strategas Republican Portfolio Relative Democrat Portfolio20-Oct-2009 to 21-Oct-2010 (Daily)20-Oct-2009=100; Local

Data Source: Prices / Exshare ©FactSet Research Systems 2010

Election Will Bring Book End Of Outcomes

# of Seats Held By Democrats In The Senate

20

30

40

50

60

70

80

'26 '36 '46 '56 '66 '76 '86 '96 '06

Dems Held 60 Seats For The First Time Since '76

Days of 2,000 Page Bills Are Over

Major Financial Legislation: Number of Pages

31

37

61

66

145

848

0 200 400 600 800 1000

Federal Reserv e Act (1913)

The Glass-Steagall Act (1933)

Interstate Banking Efficiency Act(1994)

Sarbanes-Oxley Act (2002)

Gramm-Leach-Bliley Act (1999)

Dodd-Frank Bill (2010)

Equity Markets Applaud Congressional Gridlock

Partisan Control, S&P Performance (1928-2009, Excl. 2001-02)

2.4%

9.2%

7.9%

4.9%

15.1%

0% 5% 10% 15% 20%

R Congress, D President

R Congress, R President

D Congress, D President

GOP Sen/Dem House/GOPPresident

D Congress, R President

S&P 500 Up After Every Mid-Term Election Since 1938

S&P 500 Price Return, 12 Mo. Period Following Mid-Term Election

Average Since 1950 = 17 Pct.

0%

5%

10%

15%

20%

25%

30%

35%

'50 '54 '58 '62 '66 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06

Election Will Bring “Book End” Of Outcomes

Senate Action on Cloture Motions

0

20

40

60

80

100

120

140

'74 '79 '84 '89 '94 '99 '04 '09

Motions Filed

Cloture Votes Cloture Invoked

Tax Cuts Will Get Extended For At Least One Year

Democratic Congressional Insiders:1-Yr Bush Tax Cut Extension for Everyone

9/18/10

26%

68%

5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Yes No Depends

But Comprehensive Reform Will Be Needed In The Future

Budgetary Costs of Expiring Tax Provisions, $BN

  2011 2012 2011-20 Comments

Total, Expiring Tax Cuts and Credits -394.4 -516.1 -5,959.5  

      

Total Bush Tax Cuts (2001 & 2003) -186.7 -375.4 -4897.9  

Income Tax Provisions of EGTRRA -64.6 -107.7 -1404.2  

...for those with incomes below $250k -34.6 -71.7 -775.2 Estimates, Not subject to PAYGO

...for those with incomes above $250k -30.0 -36.0 -629.0 Estimates, Subject to PAYGO

Estate and Gift Tax Changes -11.0 -42.0 -576.5 Subject to PAYGO

Relief from Marriage Penalty -6.0 -8.7 -78.7 Not Subject to PAYGO

Credits and Deductions -26.1 -96.6 -1119.7 Not Subject to PAYGO

Capital Gains and Dividend Tax Reductions -14.4 -12.7 -314.6 Subject to PAYGO

       

Alternative Minimum Tax -71.9 -31.0 -547.5 Not subject to PAYGO

Make Work Pay Credit -28.8 -62.0 -587.5 Not subject to PAYGO

Other Expiring Provisions -157.2 -155.4 -1330.8 Most subject to PAYGO

Korea & Columbia Trade Could Be Area of Agreement

Trade Weighted Dollar

60

70

80

90

100

110

120

130

'00 '02 '04 '06 '08 '10

Federal Spending Is A Target For GOP Congress

Federal Gov't Spending and Revenue (Pct. GDP, OMB Proj. '10-'20)

10

12

14

16

18

20

22

24

26

'46 '56 '66 '76 '86 '96 '06

Spending

Revenue

Spending At Highest Level Since

WWII

A Renewed Focus On Unfunded Liabilities…

Social Security Revenue and Outlays (Pct. of GDP)

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

'90 '00 '10 '20 '30 '40 '50 '60 '70 '80

RevenueCosts Exceed Revenue 2015

CostsHistorical Projected

…As Tea Party Members Must Vote For A Debt Limit Increase

Federal Debt Outstanding (Monthly, $TN)

12.0

12.5

13.0

13.5

14.0

14.5

1/ 1 2/ 1 3/ 1 4/ 1 5/ 1 6/ 1 7/ 1 8/ 1 9/ 1

Total Public Debt Subject to Limit

Debt Limit

Highway Spending Bill Requires A Tax Increase

Highway Trust Fund End-of-Year Balance or Shortfall

-80

-60

-40

-20

0

20

40

'99 '02 '05 '08 '11 '14 '17

Half of Stimulus On Highway/Rails Has Been Spent

Federal Stimulus Provisions For Highway & Rail Spending

ProvisionAllocated

($BN)Available

($BN)Paid Out

($BN)Paid Out (% Allocated)

Highway Infrastructure

$27.50 $26.86 $14.55 52.93%

Transit Capital Assistance

$8.40 $7.30 $3.14 37.34%

Total $35.90 $34.16 $17.69 49.28%

Host of New EPA Rules Coming

House Will Vote To Repeal Healthcare Bill

Support for Repeal of Healthcare Plan (Rasmussen)

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

3/ 24 4/ 23 5/ 23 6/ 22 7/ 22 8/ 21 9/ 20

Favor Repeal: 55%

Oppose Repeal: 40%