Lombardi Publishing was originally established in 1986 as an investment newsletter publisher offering stock market guidance and analysis to readers. Today, we publish 25 paid-for investment letters most of which provide stock market guidance. We have been big advocates of Chinese stocks over the years and have investment newsletters solely dedicated to analyzing Chinese stocks that can be purchased on North American stock exchanges. Profit Confidential is our daily free e-letter that goes to all our Lombardi Financial customers and to any investor who wishes to opt-in in to receive it. Written by Lombardi Financial editors who have been offering stock market analysis and guidance for years to Lombardi customers, Profit Confidential provides a macro-picture on where the Chinese economy is headed. We analyze various sectors of the Chinese economy, ultimately analyzing Chinese stocks.

The Shanghai Composite Index (SCI) has been rallying and is up 9.3% this year as of Thursday, which is ahead of the Dow Jones Industrial and just below the S&P 500.

However, playing the Chinese capital markets involves excessive political and economic risk. The country is also stalling, but continues to grow well above other global regions, including Europe and the eurozone. My investment advice is that you need to build a well-diversified portfolio that would enable you to play Chinese growth stocks, especially small-cap stocks.

China is the second largest economy in the world and is continuing to roll along at a nice pace in spite of the country’s gross domestic product (GDP) slowing to 8.1% in the first quarter, down from 8.9% in the fourth quarter. The International Monetary Fund (IMF) estimates that the U.S. will grow its GDP by around 2.5% this year, compared to around 8.5% for China.

While the risk is high in trading Chinese stocks, especially of the small-cap variety and for smaller trading accounts given the selling of Chinese reverse merger stocks over the past year, you could also play China via some good exchange-traded funds (ETFs). If you are looking for some Chinese Internet plays, find out which stocks are the most interesting in Surfing China’s Internet for Profits.

In the ETF area, I like the PowerShares Golden Dragon Halter USX China ETF (AMEX/PGJ), which has strong small-cap components.

If you are looking for more of a blue-chip focus, take a look at the iShares FTSE/Xinhua China 25 Index (NYSE/FXI), which holds the top major companies in China. Holding this fund allows you to own large blue-chip Chinese stocks you would otherwise be unable to easily get access to unless you trade Asian markets.

The ETF is based on the Xinhua 25 Index, consisting of 25 of the largest and most liquid Chinese stocks. The FXI ETF is a relatively conservative play on Chinese stocks.

With $6.10 billion in assets as of March 31, the FXI ETF has delivered relative good results since its launch on October 5, 2004. The current yield on the FXI ETF is 2.07%.

The FXI ETF has a large-cap focus, making it more suited to conservative investors, albeit even more speculative investors should have some large-cap holdings in their portfolios for diversification purposes and should avoid having all of their holdings focused in an area.

The FXI ETF has no software or hardware stocks. The five top sectors as of March 31 include financial services (52.70%), telecommunications (18.65%), energy (14.90%), basic materials (12.93%), and industrial (0.82%).

The top four holdings have been the same since the start of 2010, so you get a sense of what areas the fund likes. The large financial portion presents a higher-risk element.

The 10 top holdings are China Mobile, China Construction Bank, Industrial And Commercial Bank of China, CNOOC, Bank of China, China Life Insurance, China Telecom, China Merchants Bank, China Shenhua Energy, and Petrochina.

The average price-earnings multiple is 8.92X and trading at 1.30X book value and 1.25X sales, which indicates conservative blue-chip stocks. This index is similar to the DOW.

As far as the comparative performance, the FXI ETF has done well versus its peer group, which is defined as the Asia-Pacific region, excluding Japan. The longer-term results have been fairly good, but there have been some under performance over the last five years.

Based on the net asset value, the FXI ETF has a five-year return of 3.06% versus 3.74% for the group.

The FXI ETF may work for more conservative investors looking for some blue-chip Chinese stocks. You should have a longer-term perspective due to the above-average volatility. The risk of this ETF is below average based on a 0.90 beta versus the group.

Some of the best stocks in the market are also the best business brands. Even in bad stock market conditions, many have turned out to be excellent wealth creators, and not just long-term, but over the last few years—and months.

You might consider Starbucks Corporation (NASDAQ/SBUX) to be a $40.0-billion mature company with its big growth story over, but the company and its shares are still doing great on the stock market. Starbucks has been one of the stock market’s best stocks; it’s been going straight up since the financial crisis, more than quintupling.

Another well-known brand, NIKE, Inc. (NYSE/NKE) has been one of the market’s best stocks in recent years. You’d think that business might be slowing for a running shoe maker, but the stock was trading in the low $20.00-per-share range in the early 2000s, and then bounced between $40.00 and $60.00 in the late 2000s. Now it’s trading right around its all-time record high on the stock market of over $110.00 per share…and it is not expensively priced.

Other great branded companies that have been some of the best stocks on the market have been McDonald’s Corporation (NYSE/MCD), (see The Winning Strategy When There’s No Stock Market Catalyst), Kraft Foods Inc. (NYSE/KFT), Under Armour, Inc. (NYSE/UA), lululemon athletica inc. (NASDAQ/LULU), Coach, Inc. (NYSE/COH), YUM! Brands, Inc. (NYSE/YUM)…and the list goes on. A lot of these stocks may have had periods of consolidation or they stumbled for a little while, but, for the most part, they’ve just kept going up, and that’s why they are some of the best stocks in the equity landscape.

As we all know, the stock market can be a very unforgiving place to be. Yet, with all the noise and volatility in that marketplace, there are businesses out there that just keep trucking along and they continue to be some of the best stocks available. They may not go up the most when the rest of the stock market is on fire, but they often don’t go down as much either when the rest of the world is in crisis. NIKE and YUM! Brands both went down on the stock market during the financial crisis; but they recovered quickly, and then proceeded to go up tremendously. This is why they are some of the best stocks in the marketplace.

Over the years, I’ve come to admire consistency in the stock market, because it’s the one thing that’s so hard to find. Consider the best stocks during the Internet craze. They came, went up, and then crashed. The same thing happened to alternative energy stocks, then solar panel manufacturers, then U.S.-listed Chinese stocks. If you’re a stock market speculator on the right side of all these rolling trends, then you’re laughing; but it’s a very difficult thing to be good at consistently. And those who are good at it don’t advertise.

That’s why I view the best stocks in the stock market as those being the consistent performers. Many often pay dividends, too. It’s easy to make short-term bets on stocks. But, as I’ve mentioned before, most stock market speculators would probably have been better off just investing in Union Pacific Corporation (NYSE/UNP) over the past decade, a boring railroad stock that’s up over five fold, not including dividends. This is better than trying to chase the next big thing.

In spite of the continued hiccups due to the systemic risks posed by the European debt crisis, equities have just completed a three-year bull market and are entering the fourth year. The movement of the price and volumes illustrate that once again the markets are in a hope phase for a self-sustaining recovery in the U.S., a soft landing in China, stability in Greece, and improvement in the eurozone situation, because of the European Central Bank (ECB) liquidity measures. With regards to the eurozone, the recent policy measures to support the banking system and provide Greece with further fiscal assistance have alleviated part of the near-term systematic risks, but I believe the risks in the region remain high.

However, while the overall stock market is edging higher with 70% of U.S. stocks above their respective 200-day moving average (MA), reverse-merger stocks continue to face a tough climate based on mistrust.

The Bloomberg Chinese Reverse Mergers Index (CHINARTO) has witnessed a significant decline due to the numerous allegations related to accounting frauds.

Cornerstone Research recently published the Securities Class Action Fillings report for 2011. According to the report, the Class Action Fillings (CAF) Index reported 188 fillings in 2011, compared to 176 fillings during 2010, up 6.8% year-over-year. The average number of filings from 1997 to 2010 was 194, so the numbers are not unreasonable compared to the average.

The litigation against Chinese stocks listed on U.S. exchanges through reverse mergers accounted for a major component of filings activity during 2011. Out of the reported 188 filings, 33 were related to the Chinese stocks via reverse mergers, compared to nine in 2010, an increase of 267%. And since 2010, there have been 42 class-action filings with Chinese stocks that listed through the reverse-merger route.

Most of the filings for the Chinese stocks via reverse mergers (24 out of 33) materialized during the first half of 2011, so the situation has improved, with much fewer Chinese stocks listing via reverse mergers. There are reports that four Chinese stocks are set to be listed in the U.S., but none are via the reverse-merger route and instead are via the normal and tougher listing route. What this is doing is making Chinese stocks that list here meet the strict listing requirements, so we could see only the better Chinese stocks list here.

It has been evident from the data that Chinese fraudsters have been taking advantage of easy loopholes in the reverse-merger process, which has cost investors billions of dollars. In light of this, the Securities and Exchange Commission and exchanges have adopted strict rules for reverse-merger listing that will it difficult to cheat. The end result will be a better flow of reverse-merger and Chinese stocks to the market, which should help to add some lost confidence to the reverse-merger process.

A good strategy to use in searching for investment ideas is to follow the institutional money flow, which I discussed in Making the Best Investments: Should You Follow the Pro Money?

The Great Wall of China is not crumbling down as some are starting to suggest following news that Chinese premier Wen Jiabao cut the country’s gross domestic product (GDP) target to an eight-year low of 7.5% for 2012. As I have said in previous commentary, China is stalling and clearly impacted by the debt and muted growth in Europe, particularly the eurozone, but the country is not in a downward spiral, as 7.5% growth is comparatively good. GDP growth in the Chinese economy could plummet to as low as 6.8% in 2012 should the growth situation in Europe and theU.S. falter, according to the Asian Development Bank.

What makes me confident is thatChinawill now spend big-time with new stimulus to make sure the country’s economy avoids a hard landing, which would be quite negative. As long asChinacan cap its inflation at the official four-percent target, added stimulus will be fine. In my view, the lower rate of growth is positive, as the inflation inChinahas also steadily declined to more manageable levels. The country’s consumer price index (CPI) came in at 4.5% in January, down from 6.5% in July, representing five straight months of monthly declines in inflation.

China is aiming for “higher-quality development over a longer period of time” and will keep its current “proactive” fiscal and “prudent” monetary program in place, said Wen.

 The county wants to avoid a hard landing and halt the slide in GDP growth by initially pumping over $540 million into its banking system for new loans. China has reduced the bank reserve requirement that will allow increased loans to businesses and consumers, which will help to drive the Chinese economy.

 China’s policymakers will also cut the income tax paid by companies along with the import duties on energy and raw materials in an effort to drive domestic consumption.

 In addition, the added stimulus will include more funds available for key consumer spending areas, such as education, health and other services aimed to increase the disposable income available for consumers to spend on goods and services.

 Any impact on the Chinese economy could send shock waves around the world. The Chinese economy, which had been charging ahead on all cylinders and becoming the envy of the world, is showing some growth pains that could hamper the country’s rate of growth.

 The problem is that the global demand for cheaper-made Chinese goods has been on the decline. Part of the reason for this is that other industrialized countries are looking at driving domestic employment by protecting local manufacturing and this would negatively impact China. For this reason, the Chinese want to stimulate domestic demand for its goods.

 While the current market risk regarding Chinese stocks is extremely high as the threat of global slowing continues, I still like the future for China as an economic powerhouse, but we need to get past the near-term hurdles.

 Stocks are facing tough chart resistance and I feel the risk of a near-term downside move has increased given the Greek and eurozone risk. You can read my thoughts in Stocks at Multi-year Highs, But Watch For Some Near-term Topping.

I have long been a supporter of looking for growth in Chinese stocks. The reverse merger fiasco concerning fraud at numerous Chinese reverse merger companies killed the positive bias towards Chinese stocks, but I feel it was overdone and not justified to that extent.

The reality is that China is the world’s second largest economy and could vault ahead of the U.S. by 2040 if the growth continues, according to Goldman Sachs. China’s gross domestic product (GDP) expanded at an average of 9.3% annually from 1989 to 2010. That is impressive. Its Asian neighbor and former economic powerhouse in Asia, Japan, continues to struggle for renewal with its GDP growing an anemic 0.55% average from 1980 to 2010. China’s economy expanded at 9.8% in the fourth quarter, above the 2.8% in the U.S. and estimated 0.1% drop in Japan.

As I have said in the past, China has done well largely because it has marketed it massive cheap labor workforce and significant manufacturing capacity to the world. When you can produce goods for a fraction of the cost versus domestic production, you tend to go for the cheaper cost, especially if you’re a public company trying to make money for its shareholders.

China’s mega-power economic engine is stalling, but the growth in the country continues to be well ahead of that of the rest of the G7 countries

For 2012, China’s GDP is estimated to slow marginally to 8.6% from the previous 9.2%%, according to Goldman Sachs. This is impressive compared to the industrialized world.

Economic growth in the Asia-Pacific region is promising, including seven-percent projected growth in the developing Asian economies and a stellar 8.3% in neighbor India.

In contrast, Europe has stalled its economic engine, with Germany on the verge of a mild recession in the first quarter.

 With China continuing to grow, the demand for raw materials will remain high across many sectors; from industrial, to mining, to technology. The country is the world’s largest consumer and producer of gold. In 2010, the country produced a record 345 tons of gold, which was tops worldwide, according to research by precious metals consultant GFMS. This demand has helped to drive up gold prices and will continue.

The reality is that China is trying to reduce its need for foreign sources of metals. The country is also the leading domestic producer of aluminum, zinc and lead, and is second in tin. China is also a major producer of copper, nickel and silver. Look at some of the many Chinese mining companies, as there is huge potential under the ground.

 Yet the country continues to scour the world looking at acquisitions in raw materials. Mines with large reserves are sought after. China has made numerous acquisitions and I expect this to continue, especially as the country continues to grow and its appetite for raw materials rises.

As I said, the strong demand for gold from China will add support to gold prices going forward; I discuss this in China and India: Gold Buying Bullish.