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Kane Cotton, CFA
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Kane Cotton is Vice President and Chief Investment Strategist for Bellatore Financial, Inc., a third party asset management firm located in San Jose, CA. Mr. Cotton serves as lead portfolio manager on all Capital Allocation & Management portfolios, a discretionary asset allocation program... More
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Point of the Week
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  • Put Your Money Where Your Mouth Is: Polls Versus Prediction Markets In Predicting Election Results

    Did you hear? There's an election coming. Just kidding. I'm sure that, by now, most readers feel as if they've been in a pinball machine, being bombarded from side to side with rhetoric from both political aisles as well as their PACs and the media.

    Today, we look at the current odds as they stand in two markets. The first is the traditional polling markets such as Rasmussen, Reuters, Gallup and USA Today. In these endeavors, a somewhat statistically significant sample group of citizens (maybe 500 to 2000) are asked about various issues. The results are compiled and tabulated and are reported in the press. These polls are intended to represent the opinions of the broader population.

    In the second market, known as prediction markets, people actually make bets with real money on an issue. The idea is that when people are backing their prediction of the future by putting real money on the line, the results will be more reliable. Maybe they are, and maybe they aren't, but it's basically a cash market on predictions for the future, much like the stock market.

    (click to enlarge)

    Starting with the polling results in Chart 1, we can see that, while the Presidential race has been close at times, President Obama has generally led in the polls throughout the race. While Mitt Romney got a small boost during the Republican National Convention, President Obama erased the Governor's gains and then some after the Democratic National Convention. According to Real Clear Politics, who compiles and averages out the results of the major national polling organizations, the President now holds a lead of about 3.2%, based on polls taken during the seven day period of 9/4 - 9/11.

    The prediction market in Chart 2 generally confirms the results of the polls, but the gap is much larger. data as of 9/12/2012 shows President Obama with a 61% chance of re-election, while Mitt Romney has a 38% chance. This is a much wider margin of victory for the President than is being forecast by polls!

    (click to enlarge)

    Both methods show President Obama with a lead over Governor Romney, but when correcting for margin of error, the polling data is much closer to a dead heat than the prediction market data, which has no margin of error. Much like the stock market, there is no margin for error on a transaction. The price is what you get.

    I would personally be shocked if President Obama wins by the 24% margin being forecast in the prediction markets. After all, don't forget that the Electoral College system and the voting districts setup by the two party system typically causes inherently close elections. The counter point to that argument would be that market prices reflect all available data. Clearly, the makeup of the Electoral College and voting districts is known information. At the same time, the biggest popular vote defeat in our nation's history came when Lyndon Johnson defeated Barry Goldwater by 22.6%.

    Barring some serious traction from Governor Romney or a bombshell negative issue for President Obama, it looks like we will see four more years of an Obama Presidency. Of course, the polls on Congress are very solidly on the side of a Republican controlled House and Senate, so even if President Obama wins, he will likely be faced with continued political gridlock and an uphill battle in pushing his agenda in Washington.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Sep 13 2:22 PM | Link | 1 Comment
  • Gold Bullion Is Beginning To Shine (Again)

    The fundamental case for gold and the SPDR Gold Trust (NYSEARCA:GLD) has been challenged by many this year. Obviously, the recent price action has been more difficult to read. But gold has once again caught the eye of investors following the accommodative statements from the ECB and our own Fed.

    Gold has firmed on comments from Global Central Banks
    Daily Chart of Gold Spot Prices (Jan. 1, 2011 - Aug. 24, 2012)

    (click to enlarge)Daily Chart of Gold Spot Prices (Jan. 1, 2011 - Aug. 24, 2012)

    The chart shows the spot price of gold bullion since the beginning of 2011. After a long and drawn out consolidation after the parabolic rise to 1,900, gold has recently found some short-term strength. (Short-term support/resistance is represented by the green lines while longer-term support and resistance is represented by the blue lines.) Over the last year, gold has successfully tested the $1,550 level numerous times, and much of that time was spent below the 50- and 200-day moving averages.

    Now gold sits above both moving averages, and it has broken short-term resistance near 1,630. While the bullion is overbought (see RSI) in the short term, the likelihood that it will test the resistance trendline near 1,700 has risen substantially.

    Should 1,700 be exceeded and hold, the next likely resistance would be around 1780 and then the cycle highs of over 1,900. A bearish case would gain steam should the recent gains falter and support breaks below 1,550.

    To be clear, we believe Mr. Draghi when he says "whatever it takes." We also believe Mr. Bernanke when he says "we stand ready." Their statements have been supportive of bullion, and while a "sell the news" setup could be in the making if they do come forward with policy action, we would view such action on the fiat currency front as positive for gold prices in the longer-term.

    Disclosure: I am long GLD.

    Additional disclosure: Data source: The opinions expressed are my own and are for informational and educational purposes only. These opinions are not a recommendation or solicitation to buy, sell or hold any security. The information in this article has been researched and is believed to be accurate, but readers should not make investment decisions solely on this information. Talk to an advisor before pursuing any investment strategy. Past performance is no guarantee of future results. Investment returns and principal fluctuate through time so shares may be worth more or less than their original cost when redeemed. Current performance may be lower or higher. Indexes are unmanaged baskets of securities that are not available for direct investment; they do not reflect the deduction of advisory fees or other investment expenses such as taxes and transaction costs.

    Tags: GLD, Gold
    Sep 04 11:08 AM | Link | Comment!
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