Good afternoon,

ASX 200 down 25 points today and flat-ish for the week, adding only 0.57%. Gold and mining stocks the best performers whilst selected industrials struggled on stock specific issues (more on this later).

Franking Credits, CGT & The Election

Good Lawd I hate politics. I especially hate it when the pollies in Canberra start changing the investment landscape. It’s pretty simple from my perspective:

You want to encourage people to invest in companies and take risk (reduce the cost of capital).
You want to encourage local people to invest in local businesses that pay local company tax and create local jobs (as opposed to buying shares in a foreign company employing foreigners in a foreign country) – because everyone indirectly benefits.

Yet, Labor decides that they’ll remove an incentive for the people with all the capital (retirees) to invest it. These are the same people who also happen to contribute the least to the economy by way of consumption (because you generally spend less as you get older).

So now those retirees, who are already risk-averse by nature, really don’t want to deploy capital into local risk assets anymore, because when you stack it up, our companies aren’t as good as some of the global names… and you just took away a key ‘competitive advantage’. Instead, the retirees put that money into some other, international company and help those companies employ foreign people and generate GDP growth for their country. Net-net, we export all the growth to some foreign country, let their people prosper from the additional investment while we allow our population to age, economy to slow and we become a slightly better-looking version of Detroit?

Look, I’m not a policymaker, and I don’t know the numbers, but I reckon that doesn’t make much sense. Undoubtedly, the easiest way to increase output (GDP) in the macroeconomic equation is to increase the “I” (which stands for investment).

What’s the easiest way to increase investment in local businesses? Here’s an idea: DON’T TAX THEIR INVESTORS HARSHLY!

I’m not going to make a case for negative gearing as I’ve spoken at length about how moronic and irresponsible I think it is. I will make a strong (or at least loud) argument for capital gains tax discounts and franking credit though.

By reducing the CGT discount and removing the excess claim back for retirees, the Labor party is discouraging people with more from giving aspirational entrepreneurs money to create stuff, make bold plans and hire people to help them carry those plans on.

Australian’s needs more people with big dreams, a strong work ethic and bold investors to help them achieve it. A country where everyone is getting older, more risk-averse, and less likely to help finance innovation and creativity doesn’t result in higher wages, better standards of living, and more help for those less fortunate.

It just doesn’t make sense.

What to do if Labor gets in

Let’s say you own CBA shares and nothing else. This year you’d have received $4.31 in dividend income. If you’re retired and your marginal tax rate is 0%, you’d get a tax “refund” after June 30 of $1.72.

Under Labor, you won’t get the $1.72. Assuming you bought your CBA shares today’s price of $73, your yield falls from 8.25% to 5.90%.

So, you’ll need to generate 2.35% extra income to offset. We can achieve this using a basic options buy-write strategy every quarter. If I’m happy to cap my upside at $77 (5% above the current share price) until the end of July, I can receive an extra 60c in income. Do this three times a year and hey-presto; we’ve generated c.$1.80 in extra income.

What’s the risk?

Well if CBA shares run to $90, before July, you don’t see the upside. You swap unexpected upside for guaranteed income. This is what you want to do in retirement.

There’s really no way to increase your tax rate inside super, though there are ways to generate more income.

Movers & Shakers

Gold miners rallied despite the gold price only being up a fraction, as did the lithium companies. Orica (ORI) had an excellent result while Lend Lease (LLC) denied potential takeover speculation. Most moves are on the back of the presentations/reaffirms at the Macquarie Conference. Domain (DHG) up on the REA result.

Adelaide Brighton (ABC) & Reliance (RWC) were both down on profit downgrades. RWC is particularly disappointing, but it appears the long term investment thematic of a global transition to push-to-connect as opposed to traditional soldering remains intact, despite weather, destocking and moderating renovation and repair markets impacting more than most analysts were estimating.

Hub24 (HUB) under a fair bit of short selling pressure, TPG got dogged by the ACCC, Treasury Wines (TWE) reiterated guidance and then the CEO sold 400k shares…

Have a good week,