The biggest investment opportunities typically come when perception and reality are most divergent. Prime examples of that are the stock market in 1999 and housing in 2005. Both of those represent examples of divergences of over optimism regarding those asset classes. Our Long Term Reversal Factors try to capture that divergence. Historically it has been worth taking advantage of.
In the case of Ron Paul we have a similar situation. For those that may not have heard of him, he is running to capture the Republican Party Presidential nomination. How he would execute his platform would entail the most changes of any possible (chance of winning greater than 1%) Democratic or Republican candidate.
He would try to bring troops back to the US, not just from Iraq, but around the world. He would also push to increase the power of the States and reduce the role of the Federal Government. The ramifications of this in regards to military spending, federal debt levels, and the economy are potentially far reaching. This would eventually show up in the stock market in the form of different sectors and stocks benefiting and being hurt. It could also potentially influence the level of the stock market and commodities such as oil prices.
General PerceptionThe current perception of Ron Paul is tied to his low polling numbers of 4.3% nationally (Realclearpolitics.com average) and being in sixth place. He has never had strong polling numbers so there no the feeling among pundits that he could rebound back higher. The media up until recently seemed to think that "he doesn't have a chance" or he is a "long shot". This translates into most people not even knowing who is, or thinking he "doesn't have a chance".
In a normal race, with a normal candidate, the low polling numbers may mean exactly what the general perception is. However, this race and this candidate are far from normal.
How People Are BettingAt Intrade.com people bet on how likely it is for a candidate to win.
For the Democratic nomination the current betting is as follows: Clinton Bid: 66.6 Ask: 67.2 Obama Bid: 24.9 Ask: 25.6 Edwards Bid: 5.2 Ask: 5.4 Gore Bid: 2.1 Ask: 2.4 Richardson Bid: 0.2 Ask: 0.3 Biden Bid: 0.1 Ask: 0.2 (no other candidates have any bids) For the Republican nomination the current betting is as follows: Giuliani Bid: 28.6 Ask: 29.0 Romney Bid: 22.9 Ask: 23.0 McCain Bid: 18.0 Ask: 18.9 Huckabee Bid: 14.9 Ask: 15.2 Paul Bid: 6.4 Ask: 6.5 Thompson Bid: 3.5 Ask: 3.6 Rice Bid: 0.5 Ask: 0.9 Gingrich Bid: 0.3 Ask: 0.4 Bloomberg Bid: 0.1 Ask: 0.2 Hunter Bid: 0.1 Ask: 0.2 (no other candidates have any bids, the Field variable for any unlisted candidate has a bid of 0.1) For becoming President the current betting is as follows: Clinton Bid: 43.1 Ask: 44.5 Obama Bid: 13.5 Ask: 15.1 Giuliani Bid: 12.0 Ask: 12.2 Romney Bid: 9.0 Ask: 10.5 McCain Bid: 8.8 Ask: 8.9 Huckabee Bid: 4.2 Ask: 4.5 Paul Bid: 3.3 Ask: 4.4 Edwards Bid: 2.6 Ask: 2.9 Gore Bid: 1.6 Ask: 1.7 Thompson Bid: 1.1 Ask: 1.4 Bloomberg Bid: 0.6 Ask: 0.7 (no other candidates have any bids, the Field variable for any unlisted candidate has a bid of 0.1)
Based on Intrade.com Paul has a better chance to win his Party's nomination, and then the White House, than either Edwards or Thompson.
Also, Giulian's odds of winning the Republican nomination are not much better than Obama's odds of winning the Democratic nomination. All other Republican candidates have poorer odds than Obama. There truly is no real frontrunner that can be expected to win the Republican nomination. The race is wide open.
The Reality In IowaFor the Republican nomination the perception based on recent news articles is that Paul "has no chance", although this sentiment may not be as strong as it was a few months/weeks ago. The test of how strong this perception is will be how shocking people find his finish in Iowa.
Based on Iowa polling data over the past two weeks, Realclearpolitics.com has Paul averaging 5.5% in the polls and in sixth place.
However, Iowaindpendent.com has Ron Paul finishing third. It is based on their impression after talking with "activists, politicos, staff, and caucus-goers around the state".
How this could happen is because Iowa is a caucus. In a caucus voters don't simply vote, they have to attend a meeting for a few hours. This turns a lot of people off. So voter turnout is extremely low. In Iowa during 2000, the last time the Republican nomination was competitive, turnout was 3.8% of the total Iowa voting age population, or 86,000 people.
Organization and grassroots support play a major role when turnout is very low. The candidate who wins is the one who can get voters to caucus. This is done by getting in contact with every supporter the candidate has (on foot or by phone), getting them to caucus, and then having them bring friends.
Romney and Huckabee both should be able to bring people to caucus. Romney should because he has spent a significant amount of money over the past year to build his Iowa organization and Huckabee should because he is tapping into the existing evangelic organizational structure. They should compete for the top two spots and the polls confirm this.
Of the other candidates only Paul has any significant structure or grassroots support in Iowa. This can be partially seen by looking at search volume. Google Trends shows Ron Paul is searched in Iowa more than any other Republican candidate.
Also, Ron Paul has raised almost $19 million for the fourth quarter. This is over 50% more than any Republican raised in the third quarter and has allowed Paul to bring in 200-300 students yesterday to get in touch with the people of Iowa face to face or on the phone.
So Paul should have a very good shot of beating Giuliani, McCain, and Thompson for the third spot in Iowa. There is also a chance he could beat a Huckabee or Romney because he has the organization to be competitive.
The Reality After IowaThe Iowa Caucus is January 3rd. If Paul finishes 3rd in Iowa that would most likely shock a lot of people and may be considered a win for Paul. This would give him more credibility when the New Hampshire primary arrives on the 8th.
New Hampshire may be the most favorable state for Paul in the election. It is an open primary, meaning anyone can vote in either the Republican or Democratic primary. Paul's support relative to Romney, the current frontrunner in the state, should be strong among Independents. By being competitive with Romney in Iowa the Independents could come out for Paul and he could take the state.
At this point in the process it should be clear to everyone that Paul has a chance to win the Republican nomination. He could have more money, more grassroots support, and have voter turnout that compares only to Romney.
There is precedence for a sudden rebound similar to what Paul will have had. A national poll done by CBS News between 1/12/04 and 1/15/04 had John Kerry with 7% and in fourth place in the Democratic Primary Race. After primaries over the next month, starting with Iowa's caucus on January 19th, a poll done by CBS News between 2/24/04 and 2/27/04 had Kerry with 53% and in first place. In other words, public perception can change rapidly once the results of the early primaries come in.
The Reality For The General ElectionIn the event that Paul does win the Republican nomination, he could surprise people against the Democrats.
Intrade.com currently has the Democrats winning the White House with a roughly 61% chance. Paul would most likely undermine the Democratic base with his non-interventionist views and support of minority rights, currently considered Democratic positions. He could shake up party lines unlike anything seen since the Civil Rights Movement.
To win would require Paul to hold on to the Republican base. Because of the surprise factor of a Ron Paul nomination the Democratic candidate may not be able to reposition effectively to take a large enough part of the Republican base.
As was stated before, the ramifications of this in terms of military spending, federal debt levels, and the economy are potentially far reaching.
Ideal Stock Market ExposureOur Long Term Reversal Factors and Intermediate Trend Factors remain negative. Our ideal stock market exposure remains 0%.
