Stuck In A Rut

This is a weekly chart of the Nasdaq 100 showing the lack of progress over the last six months. The underlying fundamentals remain incredible, especially as regards the build-out of infrastructure for the AI boom, but recent record highs in bond markets and a prevailing feeling of unease about the durability of the AI boom are unsettling investors.

These two phenomena may be connected through a development known as ‘crowding-out’. Until recently the mega caps who are the principal driver of the data centre boom were able to fund new data centres from massive cash flows while simultaneously funding huge share buybacks. Now data centre spending is absorbing 94pc of free cash flow and to maintain liquidity the mega caps have turned to debt markets.

To give you an idea of what is happening several years ago debt issuance by the Megacaps was running at around $10bn a year. Last year it reached $104bn and year to date it is already $194bn. Governments are borrowing as much as ever so this activity is forcing long term interest rates higher. Higher interest rates put further pressure on corporate and government balance sheets so it is easy to see why investors are alarmed. Trump shows no sign of cutting spending; the AI boom is running hotter than ever. There are the makings of some sort of crunch here.

As all-knowing AI put it:

This heavy government borrowing, running concurrently with the massive private-sector borrowing for the AI infrastructure boom, creates the exact crowding-out effect in the bond market—driving long-term interest rates higher as both sovereigns and tech giants fight for the same pool of capital.

All sorts of factors are driving government borrowing higher. Although I feel in good shape I am in and out of hospitals as is my wife as they keep checking us for life-threatening ailments. We both have plenty of prescriptions. These are all expensive and there are more of us oldies in a world where flat growth across Europe is not generating additional funds to pay for it all.

Governments are trying to deal with the problem by quietly printing money hoping that inflation will stay broadly manageable. Inflation is bad for bonds but good for shares so we end up with an impasse in the share markets. What is needed is for me to take the reins of government, slash government spending, close down huge chunks of the bureaucracy, take a more disciplined approach to welfare and benefits and cut taxes dramatically to stimulate growth. Investors, understandably, suspect this may not happen so bond markets remain under pressure with yields moving up through five per cent.

I believe a reality check may be coming for governments and that some of the policies I would like to see will happen, but who knows, not under this government obviously. It just needs one western government to wield the knife and be rewarded by an explosion in growth and productivity for others to follow suit.

I don’t think it would take much to trigger a raging boom in London. Excellent restaurants are opening almost daily in Kensington, where I live, and are attracting queues of potential patrons. My solution is to make London the money laundering capital of the world with everything possible done to attract foreign capital, misbegotten or bona fide, into this country. Allied to scrapping stamp duty and inheritance tax and cutting top taxes generally this would attract a tsunami of cash into London, which has so many attributes making it a desirable place to live. If London booms so will the rest of the country.

Think about Cuba before the revolution which was crawling with gangsters but booming and think of it now, crumbling into the sea with tourists and foreign diplomats the only people with any money.

You don’t stop bad guys by preventing them from spending their loot in London. They need to be tackled at source which is somebody’s else’s job. It worked for Switzerland for many years and is the world a better place because we no longer have secret Swiss bank accounts. I don’t think so for a moment. The bad guys buy boats, paintings and cryptocurrencies for insane amounts of money and carry on their merry way. All that has really change is that they don’t do their shopping in London.

London property prices would explode, if we took the brakes off foreign capital, but so what. Can’t afford it. Move out. The English countryside is also very appealing and given that most Victorians happily walked to work having to commute to find good jobs in a booming metropolis should not be too big an issue with so many people working from home part of the time. Let’s all laugh all the way to the bank.

Meanwhile the AI boom, if it continues and the robots don’t enslave us all, is likely to unleash the most incredible productivity boom. We need people to think outside the box. Come on Kemi. Do more of that (promising to abolish inheritance tax and stamp duty) and I will start voting Tory again. The soft left experiment as personified by Andy Burnham, Keir Starmer and recent Tory governments is manifestly an experiment that has not worked. These jobsworths are surely going to get the boot from voters, the first chance they get.

Meanwhile I have another strategy for investing with maximum leverage in shares with stunning fundamentals. Start modestly, maybe as low as the minimum on IG which is to put in £250 a month to buy £1250 of shares. If you get a margin call top up your account with cash. Invest another £250 to buy £1250 the next month ad infinitum. What you don’t do is use paper profits to buy more shares. They should go to reducing your leverage over time. This strategy could be fun and profitable. You need to choose an exciting share. Such shares are likely to be volatile, which is good for this approach.

The golden rule is buy with cash injected into your account; never with equity gains. If you want to be more aggressive find an exciting share, Palantir, for example, put £5,000 into your IG spread betting account and make a forward bet (furthest out date) that equates to buying £25,000 worth of shares. This would buy around 170 shares which is a bet of 1.7 points. You need to be ready to inject cash if you get a margin call and thereafter invest in cash anything between £250 and £1,000 a month to buy more shares at the prevailing price. You need sufficient cash in the background to be able to cope with any margin call.

I just checked on IG and they are not presently allowing forward bets on Palantir. This may be because we are close to the next set of results for Q3 2026. Most likely these will be excellent given the tenor of the latest Letter from Alex Karp for the Q2 results, but that doesn’t mean the shares won’t be volatile. After the Q2 results the shares jumped from $125 to $162. How they will react to the Q3 results, goodness only knows, but I expect those results to be good, underpinning the long term uptrend in the shares.

Palantir is not only growing rapidly but is stunningly profitable. Q2 revenues of $1.94bn generated free cash flow (FCF) of $1.22bn. Annualised this implies that Palantir is trading at around 94 times free cash flow. Nvidia is valued at around 65 times FCF and is growing fast but not as fast as Palantir. Wal-Mart is valued at 31 times FCF but is growing sales at around five per cent a year.

Palantir’s US commercial business, around 40pc of total revenue, is growing at a staggering 149pc a year. Looking at those numbers I think Palantir is the share to buy, for excitement, certainly, but also for value.

An intriguing question is what the company does with its cash. It already has in round numbers around $10bn in cash to which it is adding another $5bn a year. Palantir is a services business and doesn’t need to invest heavily so this cash piles up in the balance sheet. At some point shareholders will be looking for the company to use that money to reward its owners. Any news on that front would be received positively by investors.

One reason why Palantir is growing so fast is that companies are worried that the large language labs will steal all their data.

A global movement is emerging.

The revolution for independence and AI sovereignty is now well underway.

Every organization in the world is awakening to the risks of handing the creators of the language models the keys to their institutions, of letting the models loose within their homes.

The demand from our partners is clear.

It is for control over data, the prompts that the models ingest, and more fundamentally the organizational and business intelligence, their alpha, that the language labs are not only ready and willing, but structurally designed to capture from their customers.

The models have grown and thrived by essentially ingesting the entire written work product of our civilization. And those models, as well as their creators, now have their sights set on global industry.

We have been the beneficiaries of the revolt that is underway against submission to this way of working.

Our customers have declined to become vassal states of the language labs. And the market is now shifting dramatically underfoot.

Given the scale of growth in all things AI this new trend could be highly beneficial to Palantir, which offers solutions to these problems. AI is amazing but it is also a thief. We need to make sure it does not steal all our stuff. Palantir seems to me to be a classic share for an aggressive programme of $-cost averaging and, on the lines above, the action could be spiced up with five times leverage. Forward spread bets may be off the table for the moment but the more expensive daily funded bets are still available.

Share Recommendations

Palantir. PLTR

Strategy – buy, buy more, keep buying

I like buying on five times leverage but you must have some solution to the wipe-out risk because wipe-outs will happen. Remember that even small sums regularly invested with five times leverage can compound quickly if you pick a strongly-performing share, but you must have cash on the sidelines and allow any appreciation in value of your shares to lower the leverage.

I am not sending out that many alerts presently because of the lack of sustained momentum in the stock market. One day things will pick up and that will trigger more activity by me.