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MARK HULBERT

The markets are the
victors

By Mark
Hulbert, CBS.MarketWatch.com
Last Update: 9:39 AM ET Nov. 3,
2004

E-mail
it | Print | Discuss | Alert | Reprint | RSS

ANNANDALE, Va. (CBS.MW) -- As I write this
Wednesday morning, the winner of the presidential election has yet
to be declared, even though foreign stock markets and the U.S.
futures market appear to have concluded that Bush has won a second
term.

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MARKETWATCH TOP NEWS

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retail sales jump bolsters futures

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It's nevertheless not too early to conclude that the markets did
a better job than the political pundits of forecasting the
outcome.

That is perhaps the most important lesson that investors can draw
from the last several months: Ignore the endless stream of
predictions issued by these pundits and focus instead on what the
markets are saying.

Of course, the markets don't always make it easy to interpret
what they are saying. In the political arena, though, they do,
thanks to the Internet-based futures markets that allow investors to
bet on, among things, various political events such as presidential
elections.

The best known of these futures are markets are Dublin-based Intrade and the Iowa Electronic
Markets. As of Monday night, both were projecting that, while
the race was close, Bush would be the victor.

Those projections are looking quite prescient right now. And they
are looking far better than the many predictions of Kerry victories
that were boldly made by so many market gurus as recently as Tuesday
afternoon.

One newsletter I monitor, for example, confidently wrote Monday
night that, when the "dust settles" Wednesday morning, "John Kerry
will be the 44th President."

Another newsletter reported on an indicator whose success rate in
predicting presidential elections was "better than any other
economic, financial or market statistic" that he had ever seen. It
also was predicting a Kerry victory.

These confident predictions notwithstanding, the electronic
futures markets continued to forecast that Bush would win a close
election.

Why do they do such a good job? To get some answers, I chatted
Tuesday night with Justin Wolfers, an assistant professor of
business and public policy at the Wharton School of the University
of Pennsylvania. He believes, he said, that the key to these
electronic futures markets' success is their ability to aggregate
and process lots of information -- far more than any of us can
individually, no matter how smart or how widely read we may be.

These electronic futures markets have this ability even if the
volume of trading on them is relatively small. Wolfers said it
doesn't take a huge amount of trading in these markets for them to
incorporate a tremendous amount of relevant information and
insight.

Of course, the relatively small size of these electronic futures
markets makes them at least theoretically vulnerable to attempts to
manipulate them, as I suggested in my Oct. 22 column. (Read
archived column.) But Wolfers said any attempt to manipulate
these futures markets would rarely have more than a short-term
effect and eventually fail.

To be sure, these futures markets sometimes are volatile. Indeed,
for a few hours Tuesday, the Intrade Bush contract dropped to below
30, in effect assigning less than a 30 percent probability to his
re-election. This happened when early exit polls appeared to show
Kerry winning.

But it hardly is a criticism of these futures exchanges that they
are not perfect. Nothing is, of course.

They appear to have come closer than any of the
alternatives.

Mark Hulbert is the founder of Hulbert
Financial Digest in Annandale, Va. He has been tracking the advice
of more than 160 financial newsletters since 1980.

More
MARK HULBERT
•What
the market's sectors think of Bush & Kerry 12:01am ET
11/01/04
•Gold's
bull market powered by weaker dollar 12:18am ET 10/29/04
•The
markets as political prognosticator 1:18am ET 10/22/04
•Nothing
special about years ending in five 12:43am ET 10/20/04
•Why
so many newsletters like Pfizer 12:01am ET 10/19/04

Latest Industry News   Get
Alerted on News in this Industry
•Treasurys
remain lower 11:10am ET 11/03/04
•Funds
that can weather election uncertainty 10:53am ET 11/03/04
•Europe,
Asia markets rise with Bush in lead 10:47am ET 11/03/04
•Likely
Bush victory lifts financial sector 9:53am ET 11/03/04
•At
least this time, Wall Street sees clear vote outcome 9:51am ET
11/03/04

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