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March 7, 2006

Bluegrass Politics by Mark Nickolas: Follow the money — the ‘smart money’

One piece of conventional wisdom I’ve learned over the years is never to listen to pundits predict the outcome of things when instead you can take a look at where the real money, or smart money, is flowing. Invariably, the money is always a better predictor.
So I put that theory to test this weekend.

Before Sunday’s Academy Awards, I peeked at www.TradeSports.com to check the current wagering on the six major awards. Rather than a typical sports book that lays out specific odds, TradeSports allows customers to trade in futures contracts like a typical exchange, with people bidding and offering on contracts, which at expiration is worth either 0 or 100. If you bought a contract offered at 80 on a particular movie, it would be worth 100 if it won, or zero if it lost.

Simple enough?
While the celebrity pundits were all over the map on the major categories, the smart money found overwhelming favorites in five of the six categories, with only Best Supporting Actor being a real race.
Well, guess what?

Those smart money heavy favorites won four of the five categories, with only “Brokeback Mountain” (trading around 81) not winning for Best Picture (the winner, “Crash,” was the second favorite among the group, trading around 18).

So I took a look around to see where the smart money was going on a host of issues related to politics as well as international and current events, and sure enough, it was a treasure-trove of information.

Traders strongly believe that Republicans will continue to control the U.S. Senate after the 2006 elections, with such a contract trading at 84.2. They’re less certain about keeping the House of Representatives, which now trades at 66.9, down from a high of 89.
How about smart money favorites for presidential nominee in 2008? In the Republican column, Sen. John McCain (Arizona) is at 35.5, followed by Sen. George Allen (Virginia) at 28.6 and former New York Mayor Rudy Giuliani at 12.

Sen. Hillary Clinton (New York) has a strong lead among Democrats at 42.5, followed by former Virginia Gov. Mark Warner at 25, and then a tie between John Edwards and Al Gore at about 6.5 each.
As for which party will win the presidency, Republicans hold the advantage — 50.4 to 47.5.

But there are plenty of contracts on ongoing political scandals. For example, a contract on whether White House aide Lewis Libby will be convicted on at least one charge in the CIA-leak investigation has climbed to 51. If you think Vice President Cheney will resign by year’s end, that will cost you 23, and if you still believe Karl Rove will be indicted, you can buy that for a bargain-basement price of just 8.
For the upcoming 2006 elections, several incumbent Republican senators are looking vulnerable, with Sen. Rick Santorum (Pennsylvania) at just 31, Sen. Conrad Burns (Montana) at 51, Sen. Lincoln Chafee (Rhode Island) at 55, and Sen. Mike DeWine (Ohio) at 60. Compare that to the re-election of Sen. Hillary Clinton, which now stands at 94.5.

On the international front, it gets interesting. A contract on capturing Osama bin-Laden this year trades at just 16, while the same on capturing Iraq-based terrorist Abu Musab al-Zarqawi fetches 19. For those who believe the United States or Israel will launch an air attack on Iran in 2006, that contract costs 22. Trading at 29 is whether British Prime Minister Tony Blair will resign, and you’ll have to pay 63 if you think the bird flu will be confirmed in the United States by year’s end.

Finally, on local matters, you can get quite a bargain if you still believe UK or U of L will win the NCAA Tournament this year. A contract on UK winning it all costs just 0.2 (that would translate to a 500-fold return if they won), and while the ask on a U of L contract is 0.1, there are presently no bidders. The favorites are Connecticut at 25 and Duke at 18.5.

Fortunately for Gov. Fletcher, there is no line yet on 2007 races.
Just remember, when you’re trying to make heads or tails of all the political talking heads and the campaign experts, you might want to just follow the smart money instead.

Mark Nickolas is a former Democratic political consultant and publisher of Kentucky’s most widely read political blog, BluegrassReport.org. Contact him at Mark@BluegrassReport.org