Quick announcement: I’m off and working from new locations for another year. I’ll be in Antigua, Guatemala for the next few weeks. While I’m here, I’m open to a small number of in-person conversations. If you’re based locally, or know someone here you think it would be worthwhile for me to meet, feel free to reach out privately at IR@DeepKnowledgeInvesting.com.
The CPI comes in light and the market celebrates renewed hopes for a dovish Federal Reserve. I still don’t think they’ll cut the fed funds rate this month and don’t think that doing so would lead to lower borrowing rates. Did OpenAI require job applicants to bring proprietary Apple AI information to interviews. Apple says they did and appears to have proof. It was a record-breaking quarter for the big banks which benefitted from a strong IPO calendar, investment banking opportunities, and a volatile market. The one-time and transactional businesses are performing better than the traditional lending business. Meta and OpenAI have new AI models which cut pricing by 75%. Some Chinese models are offering options that are 90% – 95% as good as US ones at 10% of the cost. Does anyone else think this will cause a problem for the hyperscalers who intend to spend hundreds of billions of dollars on AI-related cap-x this year? Deere had the ability to remotely disable the tractors of farmers who tried to repair their own equipment. Multiple States won a settlement intended to make Deere stop. I think there’s a big loophole though. Read on for details. Netflix earnings weren’t bad, but reductions in financial disclosure plus a miss on the revenue line had investors heading for the exit. In this week’s educational topic, we explain what working capital is and how it’s calculated.
This week, we’ll address the following topics:
- The CPI comes in far-below expectations. The Fed won’t hike, but they still can’t save us. It’s going to be more fiat printing and more inflation.
- Apple is suing OpenAI over claimed theft of trade secrets. They say there’s evidence of employees taking proprietary information to OpenAI for interviews.
- The big banks benefitted from high investment banking fees and volatility-aided trading results. Several saw record earnings which exceeded estimates.
- Meta and OpenAI have new models which cut AI token pricing by 75%. Chinese models are gaining share with huge price cuts. AI expenses remain elevated.
- Deere agrees to a settlement allowing farmers to repair their own tractors. But they inserted a poison pill and can comply with the settlement and still disable tractors remotely.
- Netflix missed by a little. The stock went down by a lot. Let’s examine the reasons.
- Have you ever wondered what working capital is and how investment bankers can use it to alter valuations? We explain in this week’s educational topic.
As usual, we credit DKI Interns, Kunal Arora and Eli Killorin, who delivered an excellent first version of this week’s 5 Things while I was on a flight to Guatemala. If you’ve wondered why recent versions of the 5 Things have tended to have 6 or 7 items, it’s because Kunal and Eli come up with so many good ideas every week. Let’s also save a big round of applause for new Intern, Param Shah. He suggested a call option strategy to pair with our long Intel position which made DKI subscribers 114% in one month. Some Interns make coffee. DKI Interns make money.
Ready for a week of lower CPI which still won’t change Fed policy? Let’s dive in:
1) CPI Comes in Light – The Fed Still Can’t Save Us:
The June CPI of 3.5% was far below expectations of 3.8% and a big decrease vs last month’s 4.2%. The monthly change of -0.4% is the biggest decline in years and was much better than estimates of -0.1%. (Annualizes to 4.9%.) Core CPI of 2.6% was below estimates of 2.8% below last month’s 2.9%. The monthly change of 0.0% was better than estimates of 0.2% and last month’s 0.2%.
The huge difference between CPI and Core is due to energy which was not a surprise as oil prices fluctuate depending on the constantly-changing situation in Iran. I have said all along that I don’t expect a quick solution to the war. I believe the key issue is that there isn’t overlap between acceptable end conditions for the Iranian Mullahs and President Trump making any ceasefire temporary. This was a point I made on June 25th in a (non-paywalled) article titled “A Personal Note” and reiterated a week later in another article titled “Are Oil Prices Really that High”. Please feel free to check those out alongside this week’s announcement from President Trump that the ceasefire is over and also declaring the official resumption of hostilities. DKI owns assets that benefit from inflation and we have a substantial energy portfolio.
Both a big decrease and still too high.
DKI Takeaway: Multiple people who I respect are saying the Federal Reserve will cut rates soon. I don’t agree with that. While it can be appealing to look at the Core number when energy prices are this volatile, even that 2.6% is too high and above the official Fed target. I tend not to focus on Core because energy and food are real costs for Americans. The employment situation remains good. The economy hasn’t gone into recession as the fiat economists who incorrectly said tariffs would lead to doom claimed. I think the cooler CPI report means the Fed won’t hike as many expected following the conclusion of the most recent meeting. However, with a still-high CPI and higher oil prices concurrent with the resumption of the war, it’s hard to see them cutting at the next meeting. For more details on the June CPI as well as information about the true rate of inflation and how the media is distorting the conversation, please check out this week’s post, “June CPI is 3.5%”.
2) Apple Sues OpenAI, io Products Over Theft of Trade Secrets:
Apple has named Chang Liu, Tang Tan, OpenAI, and io Products as defendants in its lawsuit. Apple claims Tang Tan, OpenAI’s hardware chief and former Apple VP of Product Design, asked job candidates from Apple to share project details and bring hardware components to interviews. It also accuses former Apple electrical engineer Chang Liu of failing to return a company-issued laptop after leaving for OpenAI, and that he later accessed Apple’s network to download confidential files via a security bug. io Products, an AI hardware firm co-founded by Tan and former Apple design chief Jony Ive, was acquired by OpenAI last year and stands accused of using Apple’s hardware secrets in product development. Ive was not named in the lawsuit. Apple went on to claim Liu stayed in contact with then-Apple employee Alyssa Peng (who was not named as a defendant), directing her to share confidential materials before she left to join OpenAI herself.
Apple stock has done well this year despite AI missteps.
DKI Takeaway: For OpenAI, this lawsuit comes after the company filed for an IPO targeting a valuation north of $1T. A case alleging its hardware buildout uses stolen Apple IP threatens both its credibility with public-market investors and its product timeline, since Apple is asking the court to block OpenAI from using the disputed information. For Apple, the suit signals it views OpenAI’s hardware push as a direct competitive threat rather than a partner drifting into an adjacent market. It also comes soon after the company ended its OpenAI-powered Apple Intelligence partnership in favor of Google. I continue to believe that even without stolen IP, OpenAI is going to have difficulty raising the capital they need to execute their business plan.
3) Stellar Banks Earnings:
Citigroup, JPMorgan, Goldman Sachs, Bank of America, and Wells Fargo all reported earnings that exceeded expectations, driven by a surge in capital markets activity. U.S. M&A activity rose 72% in the first half of 2026, the fastest pace on record. SpaceX’s IPO added to the boom, generating around $500MM in underwriting fees split across the 23-bank syndicate, with Goldman Sachs and Morgan Stanley as lead underwriters. Geopolitical tensions in Iran, and the resulting volatility in oil, interest rates, and currencies created profitable trading opportunities for equities and fixed income desks. Loan defaults also remained low, with delinquency rates smaller than last year.
It was a record quarter for some banks.
DKI Takeaway: These earnings were driven by favorable conditions for banks and temporary cyclical events rather than structural improvements. Banks profited from volatility and an M&A boom, and capital returns look strong partly because one-time investment banking and trading fees are carrying results that core lending isn’t. Net interest margins showed only slight compression this quarter, and net interest income stayed stable due to loan growth. When M&A activity normalizes, IPO pipelines cool, and oil prices stabilize, this quarter’s boost will fade and the underlying lending business will carry more of the weight.
4) Meta, OpenAI, and China Kick Off AI Price War:
Meta revealed its most advanced coding model yet, Muse Spark 1.1, putting a paid API in front of developers for the first time. This marks a shift from a free model to a commercial product. CEO Mark Zuckerberg claims Spark will be priced around 25% of the cost of comparable models from OpenAI and Anthropic. Following that, OpenAI announced its own new model, GPT 5.6-Sol. CEO Sam Altman claimed in an X post that it’s half the price per token and twice as token efficient (compared to Claude Fable 5), making it a quarter of the price in total (while also offering cheaper models Terra and Luna). Recent reports also indicate that Chinese models are offering prices 60-90% lower than leading American ones. These Chinese models are widely considered to be 90% – 95% as good as the US models, and due to lower prices, have captured 46% of enterprise token usage according to a CNBC investigation.
The stock has held up but AI expenses aren’t helping.
DKI Takeaway: As big tech companies try to differentiate their products over time, they all hit the same point: price competition. This could prove great for businesses which have struggled with higher-than-expected and immense token expenses. It won’t go as well for AI labs. As AI and datacenter capex keeps growing, investors are asking more questions about the return on investment. Price competition exacerbates the issue since revenue expectations will fall, leading to margin compression on already unprofitable models. AI labs will gain less cash from users to finance greater costs, likely leading to more equity/debt raises to make up the difference. DKI has previously noted that there is no end-state coming for AI products and associated expenses anytime soon. Hyperscalers who don’t continue to pour hundreds of billions of dollars into next gen models will find their existing offerings to be dated within months.
5) Deere & Company Settles with the Federal Trade Commission Over Equipment Repairs:
The FTC and five state attorneys general (Illinois, Arizona, Michigan, Minnesota, Wisconsin) settled their antitrust lawsuit against Deere & Company over farm equipment repairs. The suit, filed in January 2025, alleged Deere restricted farmers and independent shops from accessing the resources and software needed to repair “their” Deere tractors, forcing reliance on its expensive and not-always-immediately-available authorized dealer network. Under the settlement, Deere must give farmers and independent repair providers the same resources it gives dealers for the next 10 years under FTC oversight. Deere succeeded in inserting a poison pill in the settlement.
The settlement is being framed as a win for consumers. It’s not enough.
DKI Takeaway: Deere’s insistence on farmers repairing their own purchased tractors solely inside its authorized dealer network has long undermined the property ownership of farmers who legally owned the equipment. The company had the ability to disable any tractor using aftermarket parts or where a repair took place outside its network. The 10-year settlement was intended to restore that control to the actual owner. This ties into DKI’s recent coverage of Rockstar’s digital GTA VI shipments and Sony’s plans to end physical disk production after January 2028. In each case, the transaction looks like a sale but functions like a lease where the seller retains true control. Deere’s settlement is a step in the right direction for property ownership while Rockstar’s and Sony ‘s actions are a step back.
As for the poison pill: Deere negotiated a provision that said it wasn’t responsible for providing repair resources to farmers and aftermarket shops until that resource had been rolled out to more than 50% of its dealer repair network. By rolling out changes slowly and in different patterns, Deere has the capability to continue to disable purchased tractors while technically complying with the agreement making the settlement potentially ineffective in accomplishing its goals. Note also that harvest windows can be as short as a few days and delays in getting Deere to give your tractor permission to start can cause a farmer to lose his crop. The stakes here are the potential failure of family-owned farms.
6) Netflix Disappoints on Earnings:
Netflix reported its Q2 earnings. It beat EPS estimates, posting $0.80 vs. $0.79 expected, but missed revenue expectations by a minor amount at $12.56B vs. $12.58B expected. Overall, revenue was up 13.4% YoY. Net Income came in at $3.4B. Q3 guidance was soft at $12.86B vs. Wall Street expectations of $13B. The company also narrowed full-year revenue guidance from $50.7B – $51.7B to $51B – $51.4B. The stock fell as much as 12% intraday Friday.
Another stock priced for perfection and facing increasing competition.
DKI Takeaway: Netflix’s stock has been hammered over the past year, down close to 46%. Much of the weakness has resulted from its failed pursuit of Warner Bros. Discovery Inc. along with growing competitive pressure in streaming from Prime Video, Disney+, and more. The company has become a lightning rod for political anger on both sides of the aisle as much of its significant original programming has an agenda other than entertainment. Netflix stopped reporting subscriber metrics in Q1 2025 and has reduced reporting of viewer metrics. Wall Street hates when companies reduce disclosure and tends to view that as evidence that management is hiding problems. Increases in subscription costs in January 2025 and March of this year also angered some subscribers, and indicate to investors they are more reliant on price for growth. These trends added to Wall Street concerns over viewer engagement, raising valuation questions.
7) Educational Piece: Working Capital:
Working capital measures whether a company has enough short-term resources to cover its short-term obligations. It’s calculated by subtracting Current Liabilities from Current Assets. Current Assets are things a company can convert to cash within a year, like cash, accounts receivable, and inventory. Current liabilities are obligations due within a year, like accounts payable, short-term debt, and accrued expenses. A company with $80MM in current assets and $60MM in current liabilities has $20MM in working capital.
CA-CL=WC. It’s ok to keep things simple.
DKI Takeaway: Positive working capital means a company can cover near-term obligations without selling stock, taking on more debt, or selling assets. Negative working capital isn’t always a red flag and should always be read against the business model. At times, it can be a sign that the company is growing and that inventory for new stores must be purchased prior to receiving cash from sales. However, it can be a warning sign at a manufacturer with long production cycles, as cash tied up in projects can’t be used for short-term obligations.
This is also a place where investment banks can play games to justify higher valuations. When a discounted cash flow model doesn’t return a value high enough for a proposed acquisition, an old analyst trick is to reduce working capital in the out years. It’s an unrealistic projection which leads to a higher modeled value for an acquisition target.
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