Last week we hosted a call for our clients with Karl Rove, former Deputy Chief of Staff at the White House, to discuss whether the midterm elections could be a major stock market catalyst. Our basic premise heading into the discussion was that if the Republicans gain enough seats, it would be a strong repudiation of the Obama administration’s economic policies and, potentially, lead to an extension of the Bush tax cuts, both of which would be positive for the stock market in the short term.

The discussion with Mr. Rove gave us an opportunity to pick the brain of one of the most successful political strategists of the modern era. Whether you like his politics or not, Rove has won many elections. In fact, of the more than 40 races that he has been the primary strategist for, he has won more than 80% of them. A key takeaway from our discussion with him was that trends matter in elections, and they are difficult to overcome in a short period of time. Further, the direction of these trends is a leading indicator for the next electoral data point. (Sound a bit like the stock market?)

While polls on an individual basis can be wrong, in aggregate they typically provide compelling insight into the electoral landscape. Currently, Hedgeye, the research firm I work for, is focused on four specific polls whose trends make us believe that we may not be bearish enough on the prospects for Democrats in the midterm elections. (And new polls are now confirming the same things.)

Poll 1: Presidential Job Approval

This poll is the best proxy for how the President has been doing, and while his approval may not be a function specifically of his policy (i.e. the economy, which he can’t control), it is a reflection of how he is being perceived. The Real Clear Politics poll aggregate currently shows President Obama with a -2.5 spread on approval, which is the difference between Approve (46.6) and Disapprove (49.1). While this isn’t quite the lowest rating of his Presidency, it is right near the bottom. More importantly, he started his Presidency with a +44.2 spread and the trend since his election has been straight down.

The key implication of a negative approval rating for President Obama heading into the midterms is that Democratic candidates will try to distance themselves from him, and in doing so won’t be able to use the natural fundraising and bully pulpit abilities that come along with the President campaigning on your behalf.

Poll 2: Generic Congressional Ballot

The Generic Congressional Ballot measures which party those polled would vote for if the choices were generic. According to the Real Clear Politics poll aggregate, the Republicans have +7.8 advantage over the Democrats in this poll based on spread of 48.1 to 40.3. This is noteworthy given that in Obama’s first week in office this same measure had the Republicans at 34 and the Democrats at 48 for a +14 point Democratic advantage. This is an amazing reversal for the Republicans as we’ve seen an almost 22 point swing in preferences in less than two years.

Poll 3: Approval of Congress

As we’ve been writing for months to our clients, the anti-Washington sentiment is as high as it has ever been in this country. The best measure for this is approval for Congress. Currently, and once again according to the Real Clear Politics poll aggregate, almost 72% of those polled disapprove of Congress, while only 23% approve. This is a clear and strong statement against incumbency and since the Democrats currently control the Presidency, the Senate, and the House, they are overwhelmingly viewed as the incumbents.

Poll 4: Voting Enthusiasm

One of the best polls we’ve seen for evaluating voter enthusiasm is the Gallup Poll that measures “thought given to the election”. In the most recent results from this poll on September 2^nd 2010, 54% of Republicans indicated they had given some thought to the election, compared to only 30% of Democrats and 32% of Independents. This is in stark contrast to the results of this poll during the last midterm, which showed Republicans slightly lower at 53%, but the Democrats at 52%. Amazingly, the current spread between Republicans and Democrats on this measure is 24 points, which is the widest Gallup has ever measured in this poll.

While some Republican Party officials have recently been talking down their chances in the midterms, the numbers in the polls outlined above and in the table below suggest just the opposite. In aggregate, Republicans are motivated, are being clearly favored by those intending to vote, and do not have the disadvantage of having the unpopular President belong to their party. Moreover, these measures have all been trending in the favor of the Republicans for the last two years and will, absent an October surprise, likely continue to do so through the midterms.

There is a consensus view, which was shared by Mr. Rove in our discussions, that the Republicans will take back the House of Representatives and likely not wrest control of the Senate. The question in our minds after reviewing the data and trends is: are we bearish enough on the Democrats heading into the midterms? We think not. The real October surprise could be a larger than expected victory in the House and a Republican majority in the Senate.

Hedgeye Midterm Trend Analysis

Poll Type (1)	January 26, 2009	September 14th, 2010	Difference
Generic Congressional	+14 Democrats	+8 Republicans	+22 swing for Republicans
Obama Approval	+43.3 more approve than disapprove	-2.5	+45.8 swing away from Obama
Congressional Job Approval	70.7 Disapprove	72.0 disapprove	+1.3 increase in disapproval
Voting Enthusiasm (2)	+1 advantage for Republicans	+24 advantage for Republicans	+23 increase for Republicans

(1) All polls are based on Real Clear Politics aggregates, except for Voting Enthusiasm which is based solely on a Gallup Poll.

(2) Dates for Voting enthusiasm are the last midterm elections and September 2, 2010.

— Daryl G. Jones is the Managing Director of Risk Management atHedgeye, a research firm based in New Haven, Conn.