DATA SNAP: JUNE CPI, CORE ADVANCE WITHIN EXPECTATIONS

U.S. consumer prices grew moderately last month, as energy costs retreated sharply, while underlying inflation advanced within market expectations.

The consumer price index rose 0.2% in June, the Labor Department said Wednesday, down from May's 0.7% rise. The core CPI, which excludes volatile food and energy prices, advanced 0.2%, up from the previous month's 0.1% increase.

Unrounded, the CPI rose 0.191% last month. The core CPI advanced 0.232% unrounded.

The data were broadly in line with Wall Street forecasts. The median forecast of 24 economists surveyed by Dow Jones Newswires was for a 0.1% CPI increase and 0.2% core rise.

Overall consumer inflation was up 2.7% from a year ago. The core CPI, in contrast, was up 2.2% compared to a year ago, unchanged from May's yearly rate. Over the past three months, the core CPI has grown at a 2.3% annualized rate.

Later Wednesday morning, Fed Chairman Ben Bernanke will deliver his semiannual testimony to Congress, where Fed watchers will be on the lookout for any indication that the central bank has changed its views on inflation or economic growth.

But so far, the Fed's longstanding forecast for a mix of moderate growth and falling core inflation seems to be unfolding. The Fed has held the federal funds rate unchanged at 5.25% for eight meetings dating back one year and has repeatedly warned that inflation remains the predominant risk, a warning Bernanke is expected to repeat today.

In turn, financial markets have largely abandoned hopes that the Fed will lower interest rates this year.

Wednesday's CPI report will likely reinforce the Fed's view that inflation is a key risk to the economy, with core inflation still at the upper end of the central bank's implied comfort zone.

Energy prices last month decreased by 0.5%, according to Wednesday's report, a marked retreat from May's 5.4% advance. Gasoline prices fell 1.1%. Natural gas prices fell 0.1%, while electricity prices also fell 0.1%.

Food prices increased 0.5%.

Medical care prices increased 0.2%.

Housing, which accounts for 40% of the CPI index, rose 0.3%. Rent climbed by 0.3%. Owners' equivalent rent was up 0.2%. Lodging away from home was up 2.5%.

Clothing prices fell 0.6%. Education and communication prices were flat for the month.

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, increased 0.5% in June. Average hourly earnings and average weekly hours each increased 0.3%.

Fundamental Analysis

Fundamental Analysis is a conservative and non-speculative approach based on the "Fundamentals". A fundamentalist is not swept by what is happening in Dalal street as he looks at a three dimensional analysis.
The Economy
The Industry
The Company
All the above three dimensions will have to be weighed together and not in exclusion of each other. In this section we would give you a brief glimpse of each of these factors for an easy digestion
The Economy Analysis
In the table below are some economic indicators and their possible impact on the stock market are given in a nut shell.
Economic indicators Impact on the stock market
1. GNP -Growth
-Decline -Favourable
-Unfavourable
2. Price Conditions - Stable
- Inflation -Favourable
-Unfavourable
3. Economy - Boom
- Recession -Favourable
-Unfavourable
4. Housing Construction Activity
- Increase in activity
- Decrease in Activity
-Favourable
-Unfavourable
5. Employment - Increase
- Decrease -Favourable
-Unfavourable
6. Accumulation of Inventories - Favourable under inflation
- Unfavourable under deflation
7. Personal Disposable Income
- Increase
- Decrease
-Favourable
-Unfavourable
8. Personal Savings - Favourable under inflation
- Unfavourable under deflation
9. Interest Rates - low
- high -Favourable
-Unfavourable
10. Balance of trade
- Positive
- Negative
-Favourable
-Unfavourable
11. Strength of the Rupee in Forex market
- Strong
- Weak
-Favourable
-Unfavourable
12. Corporate Taxation (Direct & Indirect
- Low
- High
-Favourable
-Unfavourable
The Industry Analysis
Every industry has to go through a life cycle with four distinct phases
i) Pioneering Stage
ii) Expansion (growth) Stage
iii) Stagnation (mature) Stage
iv) Decline Stage

These phases are dynamic for each industry. You as an investor is advised to invest in an industry that is either in a pioneering stage or in its expansion (growth) stage. Its advisable to quickly get out of industries which are in the stagnation stage prior to its lapse into the decline stage. The particular phase or stage of an industry can be determined in terms of sales, profitability and their growth rates amongst other factors.

The Company Analysis

There may be situations were the industry is very attractive but a few companies within it might not be doing all that well; similarly there may be one or two companies which may be doing exceedingly well while the rest of the companies in the industry might be in doldrums. You as an investor will have to consider both the financial and non-financial aspects so as to form a qualitative impression about a company. Some of the factors are

History of the company and line of business
Product portfolio's strength
Market Share
Top Management
Intrinsic Values like Patents and trademarks held
Foreign Collaboration, its need and availability for future
Quality of competition in the market, present and future
Future business plans and projects
Tags - Like Blue Chips, Market Cap - low, medium and big caps
Level of trading of the company's listed scripts
EPS, its growth and rating vis-à-vis other companies in the industry.
P/E ratio
Growth in sales, dividend and bottom line

Stocks you can pick up this week

Zee Entertainment
CMP: Rs 293.80
Target price: Rs 354

Citigroup has raised Zee Entertainment’s price target to Rs 354 from Rs 277, while rating it a ‘buy’, as the stock is expected to increasingly reflect the company’s 2008-09 estimated earnings.

The investment bank estimates Zee’s earnings per share for 2007-08 at Rs 9.17, against Rs 5.55 reported in 2006-07. In 2008-09, the company’s EPS has been estimated at Rs 11.80. “Zee stock has outperformed the Sensex by 57% over the past 12 months, driven primarily by restructuring, that entailed de-merger of its distribution businesses, strong growth of addressable medium (set-top boxes), which will curb pay revenue leakages, and consistent improvement in viewer ratings,” Citi said in a note to clients.

State Bank of India
CMP: Rs 1,582
Target price: Rs 1,790

Motilal Oswal Securities has reiterated a ‘buy’ on SBI to factor in the value of subsidiaries and expected earnings growth over the next couple of years. “

Excluding the value of subsidiaries of Rs 733 per share of SBI, the stock trades at 0.9 times FY09E BV (estimated book value). We believe this makes the country’s largest bank a good value buy, considering the aggressive growth expected in assets as well as earnings over the next couple of years,” the Mumbai-based brokerage said in a note to its clients.

Motilal Oswal estimates SBI’s consolidated book value per share (BVPS) for 2007-08 at Rs 929, against Rs 808 reported in 2006-07. In 2008-09, the PSU bank’s BVPS is estimated at Rs 1,085.

Reliance Petro
CMP: Rs 115.45
Target price: Rs 154

Alchemy Share and Stockbrokers has initiated coverage on Reliance Petroleum with a ‘buy’ on expectations that the company’s upcoming refinery would deliver robust refining margins (difference in value between the products produced by a refinery and the value of the crude oil used to produce them). “

High margins are expected to accrue from strong demand for petroleum products outpacing additions in refining capacities,” the brokerage said in a report to clients.


Ipca Laboratories
CMP: Rs 771
Target price: Rs 1,013

SSKI Securities has initiated coverage on Ipca with an ‘outperformer’ and price target of Rs 1,013, as it believes it is one of the cheapest stocks in the pharma industry. “

While the stock has returned 182% in the past 12 months driven by a sharp recovery in profits in the previous quarters, we believe there is still significant upside left,” the institutional brokerage said. SSKI estimates Ipca’s earnings per share for 2007-08 at Rs 59.9, against Rs 49.9 reported in 2006-07. In 2008-09, the company’s EPS has been estimated at Rs 72.4.

UK trade deficit narrows in May

The UK’s trade in goods deficit was narrower than expected in May, but the better performance was marred by a sharp upward revision of April’s shortfall, data released on Tuesday showed.
The Office for National Statistics said that the nation’s trade in goods was in the red by £6.3bn in May, the smallest gap since October 2005.
Exports climbed by 3.5 per cent to £18.2bn, reflecting higher sales of chemicals and precious stones. Imports fell by a fraction to £24.5bn as the UK had less demand for fuels and oil.
After adding the £2.8bn surplus on trade in services, the total balance of trade was £3.5bn.
However, the numbers for April saw significant revision. The trade in goods deficit widened from £6.3bn to £6.9bn because the original report had overestimated exports to the European Union, particularly for trading in the types of goods associated with VAT fraud which in the past has included mobile phones and computer chips. This took the total balance of trade for April to a deficit of £4.2bn.
Peter Newland at Lehman Brothers noted that the report showed that import price inflation had rebounded and that this “may increase concerns among policymakers that the deflationary impact of globalisation is starting to ebb”.
“Strong activity means that the focus for the majority of policymakers will likely remain on the outlook for inflation; the rise in import price pressures in May is a hawkish development in this regard,” he added.