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Determining the Outcome of the 2004 Election, part II
Posted By Barry Ritholtz On April 11, 2004 @ 3:41 pm In Finance,Politics,War/Defense | Comments Disabled
Back on February 27, 2004 , I wrote a simple analysis. My position was that the 2004 Presidential election will turn on economic issues — notably, jobs.
It’s looking more and more like my original expectations  were wrong. The domestic political situation appears far more dynamic and subject to disruption than I had anticipated. Iraq is simply more volatile and subject to disruptions that what I had been led to believe in the mass media.
Ironically, this is occurring just as the Job situation is showing signs of improvement . (Some people just can’t catch a break).
The events of the past month — notably, Richard Clarke’s testimony — put that thesis  into jeopardy.
This will have an even larger impact on the purer economic data driven models of national elections; Most of these — i.e., Ray Fair’s — have such a minimal emphasis on non-economic data that any large scale external disruption utterly guts their underlying presumptions.
The events of this week further damaged my viewpoint that the 2004 election will be a referendum on President Bush’s economic stewardship. Condoleeza’s Rice’s 9/11 Commission testimony, combined with the explosive uprisings in Iraq, have converted what might have been a single issue incumbent re-election into more complex set of critiques.
Here is The Christian Science Monitor ‘s take on it:
“Current polls suggest that public opinion on the conflict could be approaching a tipping point. While Americans have always been divided over the war, a majority has consistently held that the US made the right decision in deposing Saddam Hussein. But some polls now find a majority disapproving of Mr. Bush’s handling of the situation in Iraq, and, according to a recent Pew survey, a sizable margin believes the administration does not have a plan to bring the conflict to a successful conclusion. The number of Americans calling for the troops to come home is rising, with just a bare majority now favoring keeping US troops in the region.”
. . . [t]he president’s decision to go to war has come under increasing fire in recent weeks, with officials such as former counterterrorism czar Richard Clarke charging that the effort in Iraq has actually undermined the war on terror.
As the situation on the ground has deteriorated, some Republicans, such as Sen. Richard Lugar, are questioning the administration’s plan for turning over power to Iraqis, while Democrats such as Sen. Ted Kennedy are comparing the situation to Vietnam.
If unrest continues, public support for the mission could quickly crumble – and the political consequences for Bush could be severe.
As any reader of this blog knows, I am a big believer in both Chaos Theory and Trend Momentum. If the following chart were a stock, what would you do: Buy, Sell or Hold?
Forget the company, just look at the chart:
Source: Christian Science Monitor/Tipp Poll, March 29-April 3, 2004 
This is a graphic of a long term down trend. There seems to be intervening events which cause the issue to rally, but only temporarily. Every run up seems to be met by overwhelming selling. Notice how each subsequent pop fails at a level of resistance?
• The October 2002 bounce failed to reach the June/July 2002 highs;
• The March 2003 high is a false breakout — While it did clear the December ’02 highs, it failed at the prior June/July 2002 levels, and then made a new lower low in September ’03;
• The January ’04 highs failed precisely at the March ’03 resistance levels;
• The April lows — now at new 52 week levels — might rally form here. That would probably be the last gasp of the Bulls, and as the level approaches the March ’03 lows, we should expect a massive failure.
The chart is a series of lower lows and lower highs (March 03 false breakout being the only exception). Every failure produced a new lower lows — never a good sign for any issue.
To me, this chart is a screaming short. It reminds me of AOL/TWX back in 2000. Using trend and technical analysis, I’d wait for a bounce back towards 54-55, and then short the living crap out of this.
I hasten to add that seven months is a lifetime in politics, and one must recognize that this situation will shift repeatedly between now and then. If you recall about a year ago, most people believed the economic side was a debacle and the war issue was a net positive for the incumbent. Now, the rolls have reversed, and I expect they will be fluid on an ongoing basis.
That said, when it comes to markets, I’m a trend follower. This trend remains downwards until proven otherwise.
Support eroding for Bush on Iraq 
By Liz Marlantes | Staff writer
The Christian Science Monitor, April 09, 2004
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2004/04/determining-the-outcome-of-the-2004-election-part-ii/
URLs in this post:
 Image: http://www.csmonitor.com/2004/0409/p01s04-uspo.html
 February 27, 2004: http://bigpicture.typepad.com/comments/2004/02/what_the_electi.html
 original expectations: http://bigpicture.typepad.com/comments/2004/03/economic_modell.html
 improvement: http://bigpicture.typepad.com/comments/2004/04/spectacular_job.html
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