Will The Democrats Sweep In 2006?
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Introduction

This week, we take a break from economic and investment themes and focus our attention on the political scenario, what with the mid-term elections coming up. It's actually been almost two months since I've written anything on politics. I was so turned off by President Bush's nomination of Harriet Miers for the Supreme Court that I largely tuned out politics for the last couple of months.

Here's an interesting morsel of inside information. Whenever I write about politics, readership increases. How about that? We can track how many people read this E-Letter week in and week out. Surprisingly, the political topics always get more readership than the economic/investment themes. We don't know why, but it is what it is.

Also, our response rate goes way up whenever I write about politics. Readers consistently e-mail us more responses -- positive and negative -- whenever I write about politics. We have our group of readers who respond with accolades for my political commentaries, and want me to write more. We also have our group of readers who criticize me roundly for writing about politics, and insist that I keep my political views to myself.

To the latter group, I can only say that politics does have an effect on the economy and the investment markets in various ways. And I will continue to touch on political themes now and then. While I am not a member of any political party, I tend to be a conservative on most issues, which means that some readers will disagree with my views.

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With that disclaimer out of the way, I want to focus on the upcoming mid-term elections. The current political landscape is about as confusing as I've ever seen it. The Democratic Party was in shambles following the 2004 elections. Republicans not only won the White House -- again -- but also gained seats in both the Senate and the House of Representatives.

Having failed miserably in the 2004 elections, the Democrats swerved further to the left and made liberal Howard Dean the chairman of the Democratic National Committee (DNC). Republicans were overjoyed with his selection, knowing that the majority of Americans consider themselves to be conservatives.

But a LOT has changed since November 2004. President Bush has had a terrible second term so far. Scandals have riddled the administration. Bush's approval ratings plunged to the low 30s last fall, although they have since recovered somewhat. The national psyche has actually swung back in the favor of the Democrats, as we will discuss further below.

The bottom line is that now, the down-and-out Democrats think they have a shot at retaking control of the Congress in the mid-term elections this November. Or at least this is what the media would have us believe.

In an effort to professionally analyze the 2006 mid-term elections, I called upon my in-house political junkie, Spencer Wright, to crunch the numbers and handicap the upcoming congressional derby this November. Do the Dems really have a shot at regaining control of Congress in November? Are the Republicans doomed?

Read on, and Spencer will analyze Bush's second term so far, and near the end, he will walk us through the numbers for the mid-term elections. You may be surprised at his findings.

The Coming Mid-Term Political Storm

In the electoral aftermath of the 2004 general election, the Democrats were heavily demoralized and largely directionless. Not only had they lost the presidency, again, but they also lost seats in the House and the Senate. The candidacy of John Kerry, a liberal who tried to campaign as a centrist, did not deliver victory. So in the weeks and months after the election, the Democratic Party shifted leftward. In times of crisis, political parties usually return to their roots, and so the Democrats elevated lefty ideologue Howard Dean to head the DNC and hopefully revitalize the Party for the future.

The GOP, on the other hand, was ecstatic given that they now had even more control of the Beltway apparatus and the diminishment of their political foes. To the Republicans, and to the president in particular, this victory was a validation that their course was right, and their vision and policies were shared by a majority of the voting public. This confidence, however, began to wane quickly in President Bush's second term.

The Democrats, out of power and seemingly out of energy, rallied to block the Bush administration at every possible turn. Luckily for the Democrats, the administration proved a more than willing accomplice as it executed its second term strategy with the precision of the Houston Texan's offense.

Despite being in the minority, the Democrats launched a continuous series of attacks on the administration's second term agenda. The Dem's strategy was straightforward: 1) Keep the Iraq war center stage (the war had entered its worst period in terms of casualties and a confused mission); and 2) Filibuster absolutely everything. By itself, this strategy backfired on the Democrats, and many viewed them as partisan obstructionists, even before the 2004 election.

But rather than beating them when they were down, the self-styled " compassionate conservative" Bush administration managed to come to the Dems' rescue. In the face of the Democrats' relentless attacks, President Bush ranged from being cocky to looking like a deer in the headlights, increasingly more the latter.

Initially, the centerpiece of Bush's second term was reforming Social Security. I think we can all agree that reforming Social Security is a critical priority. Yet we can also agree that President Bush and his advisors were very naïve (and overconfident) to make that their top priority. They failed to see that such a massive, politically-charged undertaking would play right into the hands of the Democrats.

Making matters worse, Bush seemed poorly organized and unable to articulate the finer points of his Social Security reform package in his initial policy addresses. The Democrats and the media savaged him as a buffoon. Unwilling to admit defeat, Bush's advisors decided to hit the road to present his case directly to the American people. Seemingly, this was a good idea but it backfired and only served to showcase the failure of the administration and the president to communicate directly and effectively to the American people about anything other than the War On Terror. Bush came off looking like a one-trick pony who could not tackle big domestic issues. This failure breathed new life into the Democrats.

While Bush's attempt at reforming Social Security failed, the American people are remarkably forgiving. Many gave Bush credit for at least being brave enough to tackle Social Security, the 'third rail' of politics. His approval ratings were still decent, although well below Bill Clinton's.

With Social Security reform down and out, the Bush administration shifted its focus to fulfilling his primary campaign pledge to make his first-term tax cuts permanent. This naturally met serious resistance from the Democrats and surprisingly, a number of Republicans. Bush then had to fight both the Democrats and the 'moderate center' of his own party. The Democrats wisely adhered to the cardinal rule of political blood sport: Do not interrupt the opposition while they are in the process of imploding.

Bush Falters, Democrats Get New Life

For all their despair after the 2004 general election, the Democrats now had reason to be hopeful. The administration's message on Social Security and making the tax cuts permanent had fallen flat. Meanwhile, each passing day brought more bad news from Iraq. And then, to the Dems' delight, came SCANDAL.

The first was the Valerie Plame debacle -- the CIA employee who was allegedly "outed" by someone in the Bush administration. The media had a field-day with this one. This scandal resulted in the indictment and resignation of Vice President Cheney's top aid, Scooter Libby. The media and the Democrats hoped that the Plame scandal would also take down Bush's top advisor, Karl Rove. While Rove was never indicted, he was clearly preoccupied with the scandal, and his absence was obviously felt during the months of investigation and the impact of his return remains questionable. The Plame affair is significant in that it was the first crack in the tightly controlled Bush inner circle.

In the twisted logic of the Beltway, it seems that one scandal begets another. Unfortunately for the Bush administration, this proved all too true. The Plame affair was followed closely by the indictment of Congressional Majority Leader Tom DeLay, a long time Bush ally and ardent supporter of the administration. This added to a growing perception that the administration was fundamentally corrupt on several levels. The Democrats, naturally, were more than happy to support and foster that perception.

Next came the scandal involving congressman Duke Cunningham (R-CA), who pled guilty to felony charges last November. Cunningham admitted to accepting $2.4 million in bribes from defense contractors and other businessmen, as well as mail fraud and tax evasion. He resigned from the House on November 28 last year. The Cunningham affair heightened the public's view that the Republicans were riddled with scandals.

Next to break was the NSA wiretapping scandal, which was first reported by the New York Times in December of last year. This story is still unfolding as this is written, and emotions run very high on both sides of this issue. Many Democrats are calling for impeachment for Bush.

Next came the Abramoff influence peddling scandal, which broke in January of this year and is also still unfolding as this is written. Jack Abramoff was one of the most powerful lobbyists in Washington, representing 11 wealthy Indian tribes and foreign clients, among other groups. Allegedly, Abramoff gave money to numerous members of Congress, some of whom have since pledged to give back the money. There are also accusations that Abramoff had been engaged in dirty work on behalf of the Bush White House.

Initially, the press went wild over the Abramoff scandal. Interestingly, however, the Democrats have not been aggressively vocal on this newest allegation. Why? Because the Dems know that the Jack Abramoffs of the world trade on both sides of the political aisle, and that some in their own party have benefited from such influence peddling.

As if the faltering domestic agenda, dark times in Iraq and scandal after scandal weren't enough bad news for the GOP, energy prices soared to record highs last year. Gasoline prices soared above $3 a gallon in parts of the country last fall, and have since only slightly relaxed from that peak. Though this is generally a function of supply and demand in the global energy market, the GOP has been blasted as having no energy policy other than to be in the hip pocket of 'Big Oil.'

During these dark days for the GOP, the president's approval ratings dipped well into the 30s. The Democrats, who only a year ago were staring into the electoral abyss, then found themselves blessed with a blooming political landscape of possibility and hope. The mainstream media also did its part to influence public opinion against Bush.

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America Shifts Leftward

It may not come as a surprise, given the situation that the GOP finds itself in, that the country is shifting leftward, politically speaking. *** Morris, one of the most astute professional politicos in the country, addressed this leftward shift in a recent article. Morris points out that the "generic party ballot" for Congress has grown to a whopping +13 for the Democrats.

The 'generic party ballot' is a periodic survey taken in which people are asked: If the election were held today, which party you would vote for? Specific candidates and issues are not mentioned. In the latest generic ballot, Americans favored Democrats over Republicans by a 13-point margin. That's huge! On its face, an advantage of that size suggests an absolute house cleaning by the Democrats in 2006. (But maybe not, as I will discuss below.)

Apart from the scandals and global economic events that have had a negative impact, the Bush administration is also heavily to blame for the Democrat-friendly environment of today. Some political analysts argue that the Bush administration has been far too effective at solving, and therefore diminishing, several key issues that comprise the core of the GOP re-election effort. Those issues center on Homeland Security and the War On Terror. These types of national security issues have always been winners for the GOP, despite the attempts by the Democrats and the media to cast them in a negative light.

As a result, the issues that are currently in the forefront are energy, the environment, healthcare and Social Security, all of which now seem to favor the Democrats. According to Morris, the president and the GOP have serious work to do if they are to improve their standing heading into the 2006 mid-term elections. Specifically, Morris advises the GOP to make their positions more clear on the major issues, and more importantly, that they emphasize the fact that the Democrats have no solutions to our problems -- other than obstructionism.

As he did so effectively with Bill Clinton, Morris is advocating a heavy dose of 'triangulation.' There is no doubt that both parties have used triangulation strategies to great effect in the past several election cycles. But in many ways, that is the problem. Once a political party embraces the positions of its opposition for the sole purpose of winning elections the individual party identities become blurred and eventually vanish altogether. We are on the verge of that happening if it hasn't already.

The GOP Is In A Bad Way (Actually, No)

Given the scenario laid out so far, with the Democrats holding a huge +13 point advantage in the generic ballot, it would seem obvious that the GOP is in real electoral trouble going into the 2006 mid-terms. Or at least they should be. According to most of the variables in play that heavily favor the Democrats, the GOP should be facing an electoral drubbing, but they aren't . I know this seems contradictory. After all, how can the Democrats be at +13 on the generic congressional ballot and not be on the brink of a massive seat windfall?

Well, the Democrats are the victims of poor electoral arrangement. What this means is that most of the contested seats in the House and Senate are in states and districts of states that are very unlikely to change their party affiliation. To put it another way, it is just bad luck. If this were virtually any other election cycle, the Democrats would clean the GOP's clock.

To understand this, we need to do the math. FYI, if you like political forecasting games, you might want to visit http://www.electionprojection.com/elections2006.html. This outfit does some pretty accurate forecasting, as I will summarize below.

Let's first consider the Senate. The current arrangement is 55(R) to 44(D) and 1(I). There are currently 13 Senate seats up for grabs in 2006. Of these 13 seats, nine of them have virtually no chance of changing party affiliation, 4(R) and 5(D). That's because they are in either strong 'red' or strong 'blue' states.

That leaves four seats that are questionable, sort of - Minnesota, Michigan, Maryland and Florida. All four are currently held by Democrats. Of the four, Florida is the most likely to switch to the GOP. If Florida goes Republican, that would yield a GOP gain of +1 in the Senate in the best of all possible scenarios. In the worst-case scenario, there will be no change. That's right. It is very unlikely that the Democrats can pick up any seats in the Senate.

Now let's look at the House, where the current arrangement is 232(R) to 202(D) and 1 (I). There are 15 contested races. Currently, the GOP looks to hold on to nine of those seats, but just barely in some cases. It is also possible that the GOP will gain three seats from the Democrats, two in Georgia and one in Illinois. The Democrats, on the other hand, look like they will gain one seat in Iowa. That would yield a GOP gain of +2 in the House in the most likely scenario.

While this may seem rosy for the GOP, do not forget that most of the variables mentioned previously heavily favor the Democrats. Any combination of which could result in a multi-seat slide in the House in favor of the Democrats. In a best-case scenario for the Democrats, which could potentially happen with the right combination of skill and luck, they could finish at +10, shifting the weighting in the House to 222(R) to 212(D) and 1 (I). That still doesn't get the Dems control of the House, but it leaves the GOP with a very thin margin.

Where the Democrats stand to make perhaps their largest gains in 2006 is in governorships. The current balance of governorships is 28(R) to 22(D). There are 19 governorships up for grabs. Based on the early polls, it looks like the Democrats will add at least three more governors to their column this year. But, if there is an electoral surge in favor of the Democrats later this year, that number could be as many as nine additional governorships.

The elections for governor are very important though often overlooked. Think of the governors as sitting in their respective parties bullpen, waiting on the chance to become the next big something. That something could be a high ranking cabinet post or an ambassadorship or maybe even the next vice-president or president. So, if there is a large shift toward the Democrats on this level, the GOP 'bench' will grow increasingly thin, which of course diminishes future national electoral prospects.

Factors For & Against A Democrat Sweep

The key issues currently in play generally favor the Democrats as discussed earlier. This is a big advantage. The GOP must address this 'issue deficit' or it could contribute to a Democrat surge in the House and the governorships. Which touches on another advantage for the Democrats - general GOP campaign ineptitude.

Politics is a blood sport, don't kid yourself. Since President Bush took office, the GOP has trended to this 'kinder and gentler' high road form of campaigning. That will only get you so far and if the Democrats smell blood in the water, they will not only take the gloves off but will stab you in the throat repeatedly. Regardless of what you have seen or read in the media, the 'new tone' is dead as far the Democrats are concerned.

Also, presidential popularity is still very low for an election cycle. Bush is currently at 43% according to an average of all the major national polls. If you are a Congressman or a Senator in a very close race (and many of them will be very close), and your party is in the White House, you can usually count on the power of a presidential appearance and endorsement to put you over the top. Does Bush still have that kind of political clout? Maybe, but maybe not.

Weighing against the Democrats are some factors as compelling as those in their favor. As this is written, the DNC has a mere $5 million on hand, compared to the $35 million on hand at the RNC. This is very bad news indeed if you are a Democrat in a close race this mid-term season. DNC Chairman Howard Dean is under fire from his own party, including Harry Reid and Nancy Pelosi for not raising enough money last year; the DNC raised about $54 million compared to the RNC $104 million. Of course, the Democrats have been spoiled having had master fundraiser, Terri McAuliffe, at the helm for so long.

Where did the money go? Dean spent heavily in building a coordinated Democratic ground organization in all 50 states, something the DNC has never had, and something that served the GOP well in previous elections. While this has drained the DNC coffers for 2006, it is an investment that has the potential to pay electoral dividends for years to come, starting in 2008.

One wonders if Dean looked at the electoral map for 2006 and came to roughly the same conclusions I did above. Perhaps Dean decided that since recapturing Congress was still a long shot, he would instead bet on the future. If so, maybe he is not so inept.

Another problem for the Democrats is that they have by far the worst leadership the Party has had in the last 30 years. Harry Reid and Nancy Pelosi are the worst kind of shrill ultra-partisans and could prove as detrimental to a close race as a foundering George Bush.

In the end, will it make a difference which party gains seats in the mid-terms this year? In my opinion, probably not. With all of the triangulation going on, the Democrats and the Republicans are morphing into a single political entity, the 'Permanency Party.' The Permanency Party seeks only to remain in power to the exclusion of all else, and grow the federal government as much as possible. All in all, it is a depressing situation.

*******************************

Thank you, Spencer, for that savvy analysis!

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Conclusions

In the 15 months since the 2004 elections, when the Republicans not only won the White House but also gained seats in both houses of Congress, the political mood in the country has shifted leftward, at least according to recent polls. President Bush's approval ratings, while up from the lows last year, are still quite low going into the mid-term election season.

Bush's second term agenda is all but dead. In my opinion, the president will be lucky just to get his tax cuts made permanent. Even that is not assured.

The media would have us believe that the Democrats will sweep the congressional races later this year and retake control. But as we've seen, it will be virtually impossible for the Dems to retake either the Senate or the House. That is not to say the Democrats won't make some gains in Congress, and especially in governorships.

Keep in mind, of course, that a lot can happen between now and November. Come election time, we will see if the mood of the country has indeed shifted to the left as the polls currently suggest. I have my doubts, but maybe that is just wishful thinking.

Finally, I am much more concerned about the presidential election of 2008. No doubt, it will be a bitter, bloody mess. With no clear successor to Bush, and Hillary on the Democratic ticket, and a public that seems to be leaning leftward, the Clintons could be back in the White House in 2009.

I must stop now -- I'm starting to feel ill!

Very best regards,

Gary D. Halbert

Gary Halbert is the president and CEO of the ProFutures companies, a diversified investment advisory firm located in Austin, Texas. ProFutures offers professional financial planning services to a nationwide base of clients. Mr. Halbert's firm specializes in tactical investing, and its recommended investment programs include mutual funds, managed accounts with professional Investment Advisors and alternative investments. For more information about the programs offered, call 800-348-3601 or visit the website at www.profutures.com.

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Copyright © 2006 ProFutures Capital Management, Inc. All Rights Reserved.


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Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.




Posted 02-07-2006 5:49 PM by Gary D. Halbert