President Obama-My Take.

Yesterday I published a Wall Street Journal editorial written by Karl Rove on the President's reelection prospects. Mr. Rove is certainly not neutral on this subject and Democrats could likely find polls more favorable to the President that would indicate that he is not in as serious trouble as Mr. Rove depicts.

I have been thinking for the past several months on whether the President can be reelected. Long time readers and clients know that I prefer to deal with the world in probability. I dislike supposed certainty such as when somebody says something like "President Obama will be defeated next year". Instead I prefer to rephrase such statements into something along these lines, "What is the likelihood of the President winning in 2012?" At the beginning of the year I would have given the President something like 65-35 favorable odds on winning in 2012. I currently think that the President's chances are less than 50-50. Here's why and what I think it means for markets for most of the next 2 years.

Forget polls it's the Electoral College that matters: In 2008 President Obama won 365 electoral votes. Almost 100 more than the necessary 270 to win. Do to reapportionment after the 2010 census at least 8 electoral votes will swing from states that the President carried to states that Republican John McCain won in 2008. This would not be enough to swing the election last time or in 2012. However, it does eat into the President's margin of victory.

In addition the President carried 6 states {Indiana, Florida, Nevada, Virginia, Colorado & North Carolina} that have been traditionally Republican and account for 83 electoral votes. The President is unlikely to have the same success this time in these states as he did in 2008. Should a Republican challenger run the table in the next election in these states and carry all of the states that McCain won in 2008 then the President's margin of victory is reduced to just 6 votes.

That leaves the battleground states of Ohio, Wisconsin, Iowa, Pennsylvania, New Hampshire and Maine. These states have between them 62 electoral votes. In my above scenario the President would need to run the table all 6. It is likely that he will win Iowa, Pennsylvania, New Hampshire and Maine. That leaves Wisconsin and Ohio as the hinge states in the next election. Both states have been battered by the national economy with Ohio being one of the hardest hit northern states.

It's the economy stupid: The next election will be won by which candidate can get the most people {particularly in the battleground states} to see their point of view. The President likely wins next year if people see evidence that the economy is improving and he can run a campaign similar to Reagan's "Morning in America" theme of 2004. On the other hand he loses if a Republican challenger can look into a camera sometime in the fall of 2012 and ask Reagan's famous question, "Are you better off today than you were four years ago?" If the election were held today I think Obama would lose this argument by a large margin.

Decisions, decisions: Some of the President's political decisions could come back to haunt him. Healthcare reform is controversial and deeply unpopular with wide segments of the population, as has been the stimulus plan and the Wall Street and auto industry bailouts. He seems to be largely absent as well on the current deficit and deficit ceiling debates. Currently the President is also catching hell from both the Right and Left for his decision to go to war in Libya. Perhaps the individual weight of any one of these decisions might not hurt him, combined they are likely to create a toxic brew that could prove fatal to his reelection chances.

What it means for investors? First let's discuss what could bail him out which is if the Republicans nominate a candidate that can be labeled to be of the Tea Party branch of the Party. Then it is likely that most of this article's discussion is moot. A Michelle Bachman or Ron Paul candidacy {or third party candidacy that syphons off Republican votes or resources} could make the President's reelection campaign much easier. The problem for him right now is that the Republicans seem serious about nominating somebody with gravitas and experience which is why Mitt Romney is doing so well in Republican and independent voter polls.

It seems to me that the President has two courses. He can veer left hoping that by shoring up his base and more liberal minded independents that he can carry the same states he won in 2008 or not lose those that are the most important to him via the Electoral College. This would likely continue to be a drag on economic growth and a headwind for the stock market. Or the President could take a page out of former President Clinton's book, abandon the far left of his party and look for issues that he can work with a Republican led Congress. Such a swing towards the center could shore up his standings with independents that deeply desire to see Washington start to take a serious view of our many domestic problems. I think this would be in general positive for both stocks and the economy. This is also the more practical and least risky road for the President to take.

A few final thoughts: Rove pointed out that 17 months is an eternity in politics. For the President though the political clock is ticking. His fate will likely be sealed by where economic and job growth is by this time next year. The action this week of releasing 30 million gallons of oil from the strategic petroleum reserve smacks of economic panic on the Administration's part. Unfortunately for the President the Republicans now smell blood in the water. It is probably not coincidence that Republican leaders walked out of the debt ceiling negotiations on the same day this announcement was made. That will likely mean that the President will have to come much more to the center than he would like if he chooses to take that route.

Democrats have a long history of eating their own. If the economy continues to stall and the President's poll numbers plummet don't be surprised if others in the party consider throwing their hat {or handbag in the case of Mrs. Clinton) in the ring.