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Every Penny Counts
Bush is ahead by half a cent.


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Larry Kudlow

Bush and Kerry are in a virtual dead heat according to the Iowa Electronic Market — a winner-take-all futures market with a great track record of picking the victors in November. At midweek, Bush was trading at 50.5 cents and Kerry at 49.9 cents.

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Kerry had taken a small lead going into the Democratic National Convention, his first lead of the year in the Iowa market. But Bush pulled ahead by the convention’s half-way point. Looks like the Boston con game — “We’re not really left liberals who believe in soaking the rich, high taxes, massive government spending, and wartime U.N. appeasement” — is not working all that well.

Between Michael Moore and Teresa Heinz Kerry — and not to mention the Woody Allen sperm-suit picture of Kerry leaked by NASA — the Democrats have a bit of a PR problem. Bill Clinton couldn’t bail them out. Nor could any of the other big Dem guns, like Carter, Gore, and Dean. True, it’s not what you would call a really deep bench. But you’d think the Democrats would get a noticeable lift out of a week in the limelight.

The Iowa futures contracts, however, are not all rosy for the Republicans: The GOP could lose the Senate. At midweek in the market for the Senate, the RSlose contract was trading at 45.5 cents, the RSgain was at 43.1 cents, and the RShold was at a mere 11.4 cents.

For those who believe in lower taxes, this is not good. The fact that the Republican Senate can’t get a corporate tax cut passed, can’t make the Bush tax cuts on dividends and capital gains permanent, and can’t get a budget passed (all while continuing to press for a budget-busting pork-barrel highway bill) is undoubtedly playing a role in the bad news from the Iowa markets.

The House, however, is in a much more bullish position. At last look, the RHhold contract was trading at 45.5 cents, the RHgain issue at 39.5 cents, and the RHlose at a low 14.9 cents.

When you step back and look at all these results, there’s a hint that the November election could produce a Bush White House working with a Democratic Senate and a Republican House. In other words, preserving the president’s pro-investor tax-cut package is possible — but it won’t be easy.

Undoubtedly, results from the Iowa Electronic Market have been a drag on the stock market for many months. In fact, economists Arthur Laffer and Tom Gallagher have published tight-fitting graphs that show a clear correlation between John Kerry’s rise in the Iowa and Tradesport.com markets and the slump in cyclical growth stocks and the overall stock market.

The expectation of multi-pronged rate-hiking by the Federal Reserve is another source of angst for the stock market. The Iowa market sponsors a pay-to-play vote on Fed monetary policy, and the news isn’t great. The FRup August contract shows a very high 90 cent price for a Fed rate hike at the next open market meeting, scheduled for August 10. The FRup contract for September shows a high 80 cent price probability for another rate hike at the Fed meeting scheduled for September 21.

Multi-pronged rate-hiking is not very helpful to George Bush either. The investor class is a core Bush constituency. If investors are in a bad mood over falling stocks and rising rates, they may not turn out sufficient margins in November to push Bush over the finish line. Pollster Scott Rasmussen finds only a 3 percentage-point advantage for Bush over Kerry when it comes to likely investor-class voters.

But at this stage of a very tight game, poll watchers take good news where they can get it. After two nights of liberal shenanigans in Boston, Bush had Kerry beat by half a penny. By the Republican convention he might have well more than a nickel’s chance of four more years.

— Larry Kudlow, NRO’s Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC’s Kudlow & Cramer.



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