Eight Stupid Rules that are a Drag on the U.S.

Eight Stupid Rules that are a Drag on the U.S. Economy

The Market Looks Great!

Solar or Wind?

As publisher of the Cabot newsletters, I have a little more license than most of the contributors of these Cabot Wealth Advisories to let my mind roam. Today we roam in eight different directions, surveying what might loosely be titled “Eight Stupid Rules that are a Drag on the U.S. Economy” before finishing, as usual, with a timely investment recommendation.

#1. The American Rule 
Americans litigate far more often than the residents of other countries. In fact, the share of our economy spent on litigation is at least twice that of Germany, France, England and Northern Ireland, respectively. Why? Because our system of risks and rewards is screwed up. In every other country in the world, the loser pays at least part of the other party’s legal fees; this rule not only inhibits the filing of nuisance suits with little merit, it helps encourage law-abiding behavior. In the U.S., however, the American Rule encourages the filing of nuisance suits that clog the court system, rewarding above all the lawyers. That’s one reason the U.S. has more lawyers per capita than any other country; there’s a lawyer for every 265 Americans. And because the people who “run” the country in Washington are generally lawyers, there’s little incentive to change.

#2 The Continuing Federal Prohibition of Marijuana
Nearly a century ago, we learned that prohibiting the production, trade and consumption of goods that the public wanted diverted public money to a vast criminal black market that supplied that want—and gave us the likes of Al Capone, Machine Gun Kelly and Dutch Schultz (real name Arthur Flegenheimer). Today we have the same situation with marijuana. Polls show that 56% of Americans support legalizing and regulating cannabis (the tax revenue would be substantial) and 80% support medical marijuana. Yet an estimated $30 billion a year continues to go to law enforcement to fight the drug war, in the process perpetuating lawlessness on both sides of our Mexican border.

#3 The U.S. Postal Service Monopoly
Thanks to the Internet, the U.S. Postal Service has become a slow-motion train wreck. In response, the U.S.P.S. is cutting costs—by reducing service to its customers!—but doing nothing to address the main problem. And Congress just kicks the can down the road. The radical solution is to free the U.S.P.S. from its outdated mission and to allow free-market competition so we all get better service.

#4 Taxi Medallions
The conceit that city fathers know best how many cabs is the right number ignores the wisdom of the free market and perpetuates a market that makes medallions so expensive only professional companies can afford them … which raises costs for customers.

#5 Liquor Licenses

#6 Immigration Laws
Forget about the problems at the Mexican border. Ignore the Miami/Cuba issue. The real tragedy of our immigration laws is that we continue to force visitors who graduate from our excellent colleges to return to their home countries! This brain drain—particularly in math and science—weakens American competitiveness while strengthening other countries. Even Bill Gates couldn’t get Washington to act, though signs are that change will be achieved eventually.

#7 Ethanol and CAFE laws
The requirement that ethanol be added to gasoline has made corn—and everything made from corn—more expensive, while contributing to the global food crisis. And the labyrinthine Corporate Average Fuel Economy (CAFE) requirements have us forced us to drive smaller, lighter, less safe cars or trucks and SUVs (which remain exempt) rather than giving us the choice of keeping safer heavy cars and driving less. If these laws were repealed, and replaced by a simple national gas tax, we’d have cleaner air, cheaper food and more choices!

#8 The Farm Bill
Born as a helping hand for struggling small farmers, it now rewards the largest professional agricultural companies like Butterball, Tyson, Sunkist, Cargill and Monsanto. It encourages the production of junk food—through subsidies for sugar, corn and high-fructose corn syrup—thus contributing to the epidemic of obesity and diabetes in the U.S. And it includes the Supplemental Nutrition Assistance Program (formerly known as food stamps), which is a nice idea but poorly implemented; I recently stood in line behind a woman who used hers to buy a jug of wine. (It was made by Gallo, one of those large agricultural companies that know how to play the game in Washington.)

Now here’s a question for you.

Which of these eight “Stupid Rules” bothers you the most?

Which do you disagree on?

If you let me know, I’ll tabulate the votes, report the results next week, and write more about the top issues! Just hit the reply button and let me know.

Moving on to investing, we’ve now had 10 solid weeks of upside market action. The Advance-Decline line has been strong. The number of stocks hitting new lows has shrunk to bull market levels. And market leadership has shifted from defensive sectors like utilities, food and big medical to growth-oriented sectors like semiconductors, e-commerce and specialty retail.

Yet the man on the street is far from bullish! Economic uncertainty remains the order of the day! True, the European situation appears less perilous than it did previously, but worries about the future of the U.S.—including Medicare, tax rates, employment rates, the price of gasoline and more—are so all-consuming that there is little interest in the stock market!

Which, in the perverse logic of Wall Street, means there are likely many more months of upside ahead for this bull market!

But where to invest?

Some of the greatest growth sectors in this market, as in previous bull markets, involve the companies that make the Internet hum, from chipmakers to interface hardware makers to companies that promise security to companies that run the software and hardware that make up the cloud.

One of my favorites today is oddly-named SolarWinds (SWI), which is in neither the solar nor the winds business.

Here’s what Monday’s recommendation in Cabot Top Ten Trader said:

“With four appearances in 2011 and five (so far) in 2012, SolarWinds is making quite a mark in Cabot Top Ten Trader. The company’s lineup of IT management software is very attractive to the people who manage corporate computer networks, reducing system downtime, increasing performance and monitoring patches, settings and memory storage. The company’s appeal shows up in its consecutive years of 30% revenue growth in 2010 and 2012 and its 40% revenue bump in Q2. The company’s after-tax profit margin of 38.7% in Q2 is just the latest of 14 quarters of margins greater than 30%. SolarWinds has more than 95,000 customers worldwide, ranging from Fortune 500 companies to small businesses. Customers are often attracted by the free downloads of the company’s software, then sign on for licenses (which accounted for 47% of 2011 revenues) and maintenance and other services that brought in the other 53%. And they stay signed on, leading to a stream of recurring revenue.”

SWI’s chart features two big spikes higher this year, both sparked by unexpectedly strong earnings releases, the latest of which was in early August. Since then, the stock has consolidated that gain, trading between 52 and 56, with an upward bias. In the meantime, the stock’s 25-day moving average has caught up, and now lends support (the 50-day moving average is down at 49).

If the story appeals to you, you could simply jump on board here (hopefully after researching the company more thoroughly for yourself). Even better, you could take a trial subscription to Cabot Top Ten Trader and keep abreast of editor Mike Cintolo’s latest recommendation on SWI, as well as other high-potential leading stocks. Details here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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