Tax cuts being promised by both sides as market continues to climb

One way or another we are all (most likely) going to get tax cuts.

That could be through Treasurer Scott Morrison’s ambitious seven year tax plan to raise the personal tax brackets at which taxes cut in and lower the rates for both individuals and companies over time.

Or through Opposition leader Bill Shorten’s plan to keep corporate taxes high but to be more immediately generous to low and middle income earners, spending $6 billion over four years to give four million people tax cuts worth $928 each a year and another six million people lesser tax cuts as well.

The reason I add the “most likely’’ qualification is that there is a world of difference between what either side of politics promises and what they can actually legislate through the Senate.

Inevitably compromises and trade-offs will be made and the actual numbers you get in your pay packet may vary quite widely from the clear rhetoric you remember.

The tax promises that both sides have made need to be viewed through the prism of the looming five by-elections caused by the latest High Court decision and a departure followed by a Federal Election sometime next year.

Both sides have now outlined their tax plans and we are going to hear a lot more debate about them – probably more than anyone in their right mind would like to hear – in the perennial battle to win the hearts and minds of the electorate.

Another thing to remember during the debate over tax cuts is that they are never as generous as they appear because of the effect of fiscal drag and bracket creep which together increase the average tax burden on taxpayers without the Federal Government needing to lift a finger.

So it is probably better to think of the tax cuts as a tax refund – and hope that the “refund’’ somehow survives the cut and thrust of political promise and counter-promise.

Energy and materials strong as retail sales continue to disappoint

If you look at the Australian share market over the past year the energy (up 21 per cent) and materials (up 28 per cent) sectors have been particularly strong.

The weakest sectors have been utilities (down 14 per cent) and telcos (down 23 per cent).

Other laggard sectors have been consumer discretionary (up 5 per cent), industrials (up 3 per cent and finance (down 7 per cent).

Of course the banks and fund managers have been getting smashed by the revelations from the Royal Commission but at least part of the rest of that malaise can be explained by Australian consumers keeping their hands in their pockets.

There are many reasons for that – very slow wage growth, high levels of personal debt and the end of the wealth effect coming from endlessly rising property prices – but the combination led to a very disappointing month of sales in March.

The absolutely flat result came as discretionary retail sales in cafes, restaurants and takeaway suffered the biggest reversal, leading to such weak retail sales over the first quarter that they will add very little to GDP growth.

That discretionary spending in cafes and restaurants had been holding the figures higher and as you might expect, a reversal has led to higher food sales as households decided to cook at home rather than eat out.

Of course your investment response to these larger trends depend on whether you go with momentum – which would see you riding the energy and materials sectors until they peak – or value, which would see you snapping up bombed out shares in telcos, utilities and discretionary consumer stocks.

Buy and hold or index investors will just hang on to what they have and see what eventuates!

Small cap stocks this week

The small cap space endured a topsy-turvy week dominated by resources news with the small ordinaries index hitting a record high of 2,800.

The bullish tone was also felt amongst larger stocks with the ASX 200 closing above 6,000. The last time Australia stocks reached such heady heights, profit taking ensued taking both large and small cap indices lower.

Next week is likely to be a key crossroads for Australian stocks with investors eager to see whether the market has the legs to hold onto gains made over the past few weeks and this week’s breaks above key technical levels.

Medibio (ASX: MEB)

Mental health is making headline news with technology company announcing a string of commercial deals with several top-notch organisations including the AFL, Rio Tinto, the largest Catholic hospital services provider (St John of God Health Care) and the Aurecon Jacobs Joint-Venture (AJJV), responsible for delivering the West Gate tunnel project, considered to be the largest infrastructure project in the southern hemisphere.

Medibio is actively expanding its new corporate health division and promoting its new mental health product ‘Medibio Inform’ with this week’s news indicating its staged launch has gone rather well.

From a shareholder point of view Medibio’s commercial expansion sets up the potential for the company to deliver a three-fold return on investment with Medibio shares reflecting the expansive news by rising around 10% this week.

Jervois Mining (ASX: JRV)

Jervois Mining is on a commercial exploration mission after securing almost A$6 million in cash from a royalty sale and immediately kicking off a A$1.35 million cobalt exploration programme in NSW.

The sale of the Nyngan and Flemington royalties to Cobalt 27 forms part of Jervois’ strategy to offer investors more direct exposure to lithium-ion battery cathode raw materials.

Jervois said that after completing its royalties sale this week, it forecasts to end 2018 with more than A$22 million in the bank and on course to develop its new priority targets: drilling campaigns at Ardnaree and Thuddungra costing around A$5 million – two high value prospects that are expected to underpin a pre-feasibility study later this year and quickly followed by a definitive feasibility study thereafter at its Nico Young cobalt-nickel project in NSW.

Bowen Coking Coal (ASX: BCB)

Bowen Coking Coal completed the acquisition of the Hillalong East coking coal project this week for a paltry A$100,000.

The project includes two tenements which still require final approval from the Queensland Government, although these are expected to be a formality.

With exploration already scheduled and expected to commence later this year, exploration targets and first indications of a resource are already on the horizon. Bowen currently has several coking coal projects in motion with Cooroorah in central Queensland, adjacent to Westfarmers’ huge Curragh mine, being the most advanced.

With its latest acquisition likely to be rubber stamped later this year, Bowen plans on becoming the latest Australian-based cost-effective coking coal producer to feed the global steelmaking industry.

Titomic Limited (ASX: TTT)

Golfing aficionados could soon be benefiting from Titomic’s manufacturing process following a cornerstone agreement with the world’s largest golf club manufacturer Callaway Golf Company to develop new products using Titomic’s kinetic fusion process.

Under a 12-month collaboration agreement, Titomic’s advanced additive manufacturing capabilities will be used to manufacture golfing products using titanium and possibly help to deliver an entirely new range of titanium-infused golf clubs.

Until now, using titanium for mass manufactured products has been cost prohibitive but Titomic is looking to change all that by using its proprietary fusion process that could well see titanium used in more products than ever before.

Stonewall Resources (ASX: SWJ)

Despite difficult ground conditions, Stonewall Resources has delivered “very positive gold grades” during its latest round of exploration at its Theta Hill deposit in South Africa.

One drill intercept delivered a “bonanza grade” result of 126g/t gold.

Following its encouraging results, Stonewall now thinks gold mineralisation at Theta Hill is closer to surface than first thought and could also stretch further than first estimated.

Given the strong exploration momentum following its “impressive” results, the gold junior is itching to get back into the field and wants to prove up resources and reserves to underpin a 100,000 ounce per annum operation.

Northern Cobalt (ASX: N27)

Northern Cobalt announced highly encouraging “exceptional” thick high-grade cobalt intercepts this week, to the applause of shareholders.

The results were derived from the broader reverse circulation drilling campaign that was undertaken in the latter half of last year.

The company’s findings showed that its diamond drill results indicated mineralisation was closer to surface than first thought which paves the way for lower cost open pit production.

Samples from its diamond drilling program have now been dispatched to Germany for analysis with results keenly anticipated within the coming weeks.

Fremont Petroleum (ASX: FPL)

With oil prices trending higher and slowly creeping back above US$70 per barrel, commercial life for oil companies seems rosy once again.

Fremont shares were off to the races this week as the oiler announced a 40% production increase across its oil operations and hailing its entry into cash flow positive territory.

For the month of April, Fremont reported oil production of 3,336 barrels of oil, comprised of its US-based Pathfinder project contributing 2,909 barrels while its Kentucky field adding a further 427 barrels.

The figures put its March total of 2,002 barrels into perspective and underlined its surging production improvement this year.

Work-overs have been finished across 13 wells to-date, with seven more to undergo treatment which could see the oiler announcing further production expansion later this year.

The week ahead

There are a few things to watch out for this week but the Reserve Bank minutes on Tuesday the pick of them.

The RBA has been predicting a gradual improvement in consumer spending so it will be interesting to see if the flat retail sales numbers lead to any change of language from the Reserve Bank board.

If household spending remains weak, we can probably look forward to an even longer period of time in which the Reserve Bank holds its official cash interest rate at the current low of 1.5 per cent for quite some time to come.