Quick election prediction

[dougo]

Recording this here for posterity:

After this coming election, the stock market will go down. I think a Democrat takeover of Congress has already been priced into the market. If they do win both houses, it will come down a little bit due to profit-taking; if they win one house but not the other, it will come down a fair amount, although it might go back up because the market likes governmental gridlock; but if the Republicans keep both houses, it will be a large crash.

I guess this means I should short some stocks, but I'm not a gambler, and more importantly, I have no real idea what I'm talking about. This is just a wild hunch. But it's kind of fun to make public predictions based on wild hunches.

Comments

[greyaenigma.livejournal.com]

Hmm, I might feel less bad about not having re-invested my money i that happens. A second chance!

[pobig.livejournal.com]

Hmm, how much, and over what time span?

[dougo.livejournal.com]

Oh, you want specifics for my wild hunch? OK, how about this (getting out my dartboard):

At market close on Friday, Nov 10, the Dow will be at 11,950 if the Dems win both houses, 11,800 if the Dems win one house, 11,500 if the Republicans keep both houses, and 11,200 if the Republicans actually gain seats in either house (in which case there will be the chaos of vote tampering allegations).

I suppose to be complete I should also predict how the election will go. I guess the safe bet is to say the Dems take one house. But I would actually not be surprised if the Republicans keep both houses, just barely. I don't trust the polls (and/or the voting machines) after the Kerry exit poll thing in 2004.

[mshonle.livejournal.com]

The Democrats will take Congress, but not the Senate. The market won't do much of anything because of the elections. A new report about inflation or the housing market, however, will.

[randomenvy.livejournal.com]

Instead of shorting stocks, think of shorting indices (or playing with options).

[dougo.livejournal.com]

Yeah, that's what I meant.

[wrog]

In terms of straight shorting, futures give you the most bang for the buck. To short the Dow at $10/point using stocks, you'd have to short $120K worth of stock, for which the initial margin requirement is $60K with maintenance around $36K. To get the same position with futures, you sell a single a contract for which the corresponding numbers are $4875 and $3900, respectively.

It's true that options can give you even more leverage but because options expire and you have to pick a strike price, you only really see the big wins when you know/guess-right on when and how far.

On the other hand, after a certain point, more leverage really just means more rope to hang yourself with.

[jtemperance.livejournal.com]

I expect stocks to go down in the next few years anyway, just because they're valued too high, but I'm not prepared to bet on the timing of when they'll go down.

[wrog]

yeah, looks like I may be placing some more bets.

Admittedly my last bet (that the downturn in July at 10700 was the beginning of a much bigger move down) turned out to be disastrously wrong. On the other hand, the kind of continuously-going-up without even a minor correction that we've had since then has pretty much never happened in the history of the stock market without being followed by some kind of major break (usually a >10% correction -- which, oddly enough will get us back to around 10700 or so...).

I think you're right that the Democratic takeover of the house is pretty much priced in at this point, or at least, the sober scenario -- in which the Democrats get the 15 seats they need plus a few more + some kind of finely balanced picture in the Senate where majority will be determined by who can kiss Lieberman's ass the hardest -- is priced in, and if that comes to pass then we've probably got a few more months before the shit really hits the fan (as it has to eventually).

But if something unexpected happens -- whether we're talking about the Republicans hanging on by a thread or some kind of massive Democratic blowout in which we pick up 50+ seats and entirely flush Lieberman and get the Senate back with a 2 seat majority --- then I think that may well be an excuse for market mayhem. Politically we'll be in unknown territory and that's got to drive the volatility up; and given the underlying economic weakness, I can't see that being an excuse for a rally.

The other thing -- and this may be in tin-foil hat land, but I don't think this is totally insane -- is the Saudis and the big oil companies have been pulling hard for their patrons -- even if the rest of the business community is tired of shrub, they, at least, have absolutely no interest in a Democratic congress -- meaning whatever cards they've been able to play to keep gas prices down and the economy up, they've been playing, and after next week it won't matter.

Which seems to suggest that some kind of long position in CL (light crude) or HU (unleaded gas) futures might be in order. We'll see how much guts I have for that one.

Never mind that oil going back up will be the last nail in the coffin as far as our staying out of a recession is concerned...