HCMI Client Letter - November 11th, 2004

Dear Clients and Friends,

 

As of 10 AM EST, the US Presidential Election results are:

 

 
Electoral
Popular
% of
 
Vote
Vote
Vote
President George Bush
254
51.6%
58,239,100
Senator John Kerry
252
48.4%
54,689,229
Margin
 
3.1%
 3,549,871

 

 

270 Electoral votes are needed to claim victory, and three states remain undecided:

 

Undecided
Electoral
 
 
 
 
 
 
States
Votes
Bush
Kerry
Margin
Ohio
20
51.2%
2,794,346
48.8%
2,658,125
2.5%
 136,221
New Mexico
7
50.9%
335,311
49.1%
323,691
1.8%
   11,620
Iowa
5
50.5%
741,325
49.5%
725,700
1.1%
   15,625

 

We commented previously that Ohio was the "ultimate battleground state."  With 175,000 provisional ballots to be counted, it is statistically possible for Kerry to win Ohio, but it is not likely.  New Mexico and Iowa must also count provisional and absentee ballots, but those results will not be enough to offset the outcome in Ohio.  Therefore, we feel comfortable projecting a final electoral count of at least 274 for George Bush, probably as high as 286.  It will take a week to 10 days to complete the count in these states.

 

An average of the last tracking polls from six organizations showed Bush with about a 2% lead going into Election Day.  An average of polls has a higher predictive value than any one poll (which typically have an error of plus/minus 4%) because the errors tend to cancel each other.  Exit polls, which are interviews of voters as they leave the polling place, initially showed Kerry with outsize leads in several swing states.  The traditional news services have agreed not to report exit polls until after polls close, to avoid effecting turnout.  Exit polls were reported as early as 2PM on various Internet sources showing Kerry with substantial leads that did not match up with the final pre-election state polls.  As the day progressed, however, the exit polls converged with both the pre-election state polls and the reported totals. 

 

Speaking of the state polls, going into the election it looked like Bush would get 276 electoral votes including Florida, Iowa, Minnesota, Nevada, and New Mexico

while Kerry  would get  262  including Hawaii, New Hampshire, Ohio, Pennsylvania and Wisconsin .  Kerry in fact got Minnesota, but Bush will most likely get Ohio. 
 
Our other resource, TradeSports.com, actually had better predictive value than the polls.  24 hours before the election, TradeSports had Bush winning the election with a 55% probability, winning the popular vote with a 55% probability, gave Bush a tiny lead in Ohio and Iowa, while giving Minnesota to Kerry (correctly calling every state,) and projected that Bush would most likely pick up between 270 and 280 Electoral votes. 

 

What happens next?

It's possible that the Kerry campaign concedes in the next few days, or it's possible that the election won't be certified until a count of provisional votes is completed in Ohio, New Mexico and Iowa is completed.  It's possible that the Democrats file suit in Ohio demanding a recount as we saw in Florida in 2000.  However, given a 3.5 million vote lead in the popular count (versus a deficit of 540,000 in the 2000 election), there won't be the same momentum for litigation (the outcome we feared the most.)  We expect this election to be wrapped up in, at most, two weeks, and given the relief rally in stocks today, it seems that most investors agree.

 

The big picture

The Republicans, who have a majority in the House, Senate, the Governorships and whose candidate enjoyed a 70% approval rate a year ago, should have run away with this election.  Instead,  the Bush  administration not only made crucial mistakes both at home and abroad (which is forgivable) but completely failed to explain their strategy and how they  would adapt their strategy to meet present realities (which is not forgivable.) 
 
However, the Democrats, who enjoy a plurality among registered voters, when given an opening the size of Texas, failed to capitalize on that opportunity.   We originally referred to Bush and the Democratic candidates as "Snow White and the Eight dwarfs."   The problem that the Democrats face in their primary process is that the successful candidate must run way to the left during the primary, then run back to the center for the general election.  The make or break issue in this election was, ultimately, national security, but prosecuting the war in Iraq, and ultimately the war against Al Qaeda, is anathema to the Democratic base.  Kerry could not make headway on the state of the economy (which is muddling along just fine) but was found "not credible" on the issue of national security based on the history of his votes in the Senate. 
 
Republicans increased their majority in the Senate from 51 to 53, and potentially to 55 when two remaining races are decided (51 is a majority, 60 is a filibuster-proof majority.)  In the House, Republicans increased their majority by 3 to 229 (218 is a majority) with 5 races undecided.  The Republicans majority hold of governorships in unchanged at 28, with one race (Washington state) undecided.
 

2008 Presidential Election

The 2008 election gears up in a week or so.  Potential Republican candidates include Vice-President Richard Cheney, former mayor of New York Rudy Giuliani, Senator John McCain of Arizona, Senator Bill Frist of Tennessee, Governor Jeb Bush of Florida, Governor George Pataki of New York.  On the Democratic side, potential candidates include Senator Hillary Clinton of New York and that's about it.  Plainly the Democrats have a lot of work to do over the next four years to be competitive in the next election.

 

Strategy

We invested our clients assets this summer in anticipation of a Bush win, and, over the last week and particularly today, have been rewarded.  Extending the rally, the price of oil has fallen sharply as we expected (from a high of $55.50 last week, oil has declined 12% to $49 as the supply/demand imbalances of the last three months work themselves out.)  We expect oil to trade down towards $40/barrel by Spring 2005.  Overshadowed by the election, US companies (78% of S&P 500) grew earnings in Q3 at a year over year rate of 15.9%, with revenue growth of 11.6% (numbers from First Call.)  With ten year bond yields averaging around 4.10%, the stock market remains about 35% undervalued.  We have some cash on hand from recent in-flows and will be investing it fully over the next week.  The S&P 500 is up 3.0% on the year, and we still believe our 8% year end target will be met.

 


Yours sincerely,
David Edwards, President
Heron Capital Management, Inc.
(800) 99-HERON
http://www.HeronCapital.com

The Heron Capital Management client letter is published immediately following quarter end and 1 or 2 additional times per quarter. The views expressed in this letter represent HCMI opinion and strategy as of the date published and can change at any time upon receipt of new information. Data quoted in this letter are from sources deemed reliable, but no guarantee of such data is implied.