Even a time of heightened uncertainty, there’s one thing a majority of markets agree upon: Chinese data is unreliable, particularly figures released by regional governments.

Making the case for market mistrust, a report from Xinhua, a state-run government news agency, released over the weekend stated that “several” local officials in China’s Northeast region admitted to faking economic data in recent years to show high rates of growth when the real numbers were much lower.

According to the China Daily website, citing Xinhua, several officials acknowledged they had significantly overstated data ranging from fiscal revenue and household income to GDP.

“If the past data had not been inflated, the current growth figures would not show such a precipitous fall,” one unnamed official told Xinhua, attempting to explain why growth rates across the region were now among the lowest in the country.

If investing when Chinese economic data is faked were not a serious issue for investors this would be funny! Regional officials were rewarded for falsifying information that made the Chinese economic miracle seem even more miraculous. Now, when the Chinese economy is going to Hades in a hand basket, officials “admit” that the “real” numbers were substantially lower. Thus, the argument goes, things are not really all that bad because the economy was already slow and this year it has not fallen all that much farther. Where does an investor look for accurate information? Is it wise to simply avoid Chinese stocks? How about the effect that China has on developing economies and the global economy in general?

When the Numbers Do Not Make Sense

In the run up to the dot com market crash famed investor Warren Buffet said that he had gotten out of every stock (including dot coms) that he did not understand. This is the most successful investor in the world who insists on understanding how a company makes money and how it will continue to make money before investing a single cent, not to mention a few billion dollars. To the extent that a Chinese stock trading as an ADR in the USA is affected by poor economic numbers it is time to sell. To the extent that the data is meaningless it is past time to sell. Chinese exports and imports are both falling. And some analysts are questioning the stability of China’s economy as reported by Bloomberg Business.

[VIDEO] Richard Haass, president at Council on Foreign Relations, discusses the stability of a Chinese economy in transition and question marks surrounding the Middle East. He speaks on “Bloomberg Surveillance.”

The issue of most concern for those who are invested in China is political stability. China has change dramatically since opening to the West in the Nixon era. The Chinese people are certainly aware that their government is a dictatorship. But, so long as prosperity continued people were willing to ignore the lack of freedom. The concern for the leadership is how to maintain control when the economy continues falter. At what point will political unrest become a major issue? Social instability in China would be a more serious concern than investing when Chinese economic data is faked.

Investing When Chinese Economic Data Is Faked PPT

Federal Reserve Chair Janet Yellen, surveying the financial landscape for signs of bubbles after more than six years of near-zero rates, warned that both stocks and bonds are richly valued.

“I would highlight that equity-market valuations at this point generally are quite high,” Yellen said in Washington on Wednesday in response to a question at a forum on finance. “Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”

Yellen said bond yields “could see a sharp jump” when the Fed raises its benchmark interest rate. Most Fed officials predict that will happen this year for the first time since 2006.

Are stock prices too high? If that is the case investors will be well advised to take a little off the table and hold cash until the market corrects. Warren Buffett says that it all has to do with interest rates.

Interest Rates and the Dollar

As quoted in The Guardian, Berkshire Hathaway CEO Warren Buffett says that if low interest rates persist today’s stock prices will seem low over the long term. And if interest rates increase stocks will suffer.

Warren Buffett has warned that stock prices will appear expensive if interest rates increase from their current ultra-low levels.

“If we get back to normal interest rates, stocks at these prices will look high,” said the billionaire investor, speaking at the annual shareholders’ meeting of his conglomerate Berkshire Hathaway.

Buffett, one of the world’s most famous investors, is widely followed for his advice on finance and life. With Wall Street and many European stock markets around all-time highs, his views on the US and global economy will be watched closely.

Are stock prices too high? They are if interest rates are going to rise. That all depends on the US Federal Reserve.

The Fed

The Washington Post weighs in with the opinion that job growth could cause the Fed to raise rates sooner than later.

Friday, the Labor Department is expected to report the economy added 220,000 jobs in April and push the Federal Reserve toward raising interest rates.

Meanwhile measures of core inflation-consumer prices net of volatile energy and food prices-have firmed in recent months and are approaching the Fed target of 2 percent a year. And history has taught economists that once inflation accelerates, it is very difficult to contain, strengthening the hand of hawks among Fed policymakers.

Still raising interest rates-likely not in June but perhaps by September-to moderate inflation entails great risks.

The appreciation of the dollar has taken a big bite out of U.S. growth, and increasing U.S. interest rates-when central banks in Europe, Japan and China have sharply eased monetary policy-risks pushing the dollar up even further and end the U.S. economic recovery altogether.

If the Fed raises interest rates and the worst case scenario occurs the stock market rally will be a thing of the past and the US economy will suffer. Are stock prices too high? They probably are.

Are Stock Prices too High? PPT

The Intrinsic Value Formula

Benjamin Graham published a formula for calculating intrinsic stock value in 1962 and modified it in 1974. The 1974 version considers the following:

• Earnings per share, EPS, for the preceding twelve months

• A constant of 8.5 representing an expected price to earnings ratio, P/E ratio, for a company that is not growing

• An estimate of long term growth, five years = g

• A constant of 4.4 which was the average yield of high grade corporate bonds in the early 1960 decade

• The current yield of AAA corporate bonds = Y

• Where V = intrinsic value

The formula is as follows:

V = (EPS x (8.5 + 2g) x 4.4)/Y

The way the investors were encouraged to use intrinsic value was to derive what is referred to as a Relative Graham Value, RGV. The RGV is the calculated intrinsic value of the stock divided by its current price. If the result, the RGV, is less than one the stock is overvalued and a bad investment and if the ratio is above one it is undervalued and may be a good investment. The point of fundamental stock analysis is clearly to take advantage of good investments and avoid bad ones.

Fundamental Stock Analysis over the Long Term

Fundamental stock analysis helps long term investors see value in underpriced stocks.  In our article value investing for 2015 we looked at depressed oil stocks.

The price of oil is all about the US fracking boom and OPEC trying to protect its market share. In the Middle East it costs about $17 to produce a barrel of oil. This includes finding the oil and then bringing it to the surface. In the USA this figure is $31 on land and $52 offshore. Thus the Saudis and others better afford a drop in the price of oil than US companies engaged in high tech extraction of oil trapped in shale deposits. Value investing in 2015 will have a lot to do with how long OPEC continues to produce oil at the current rate and how badly they want to protect market share at all costs. So long as high production continues as both Japan and Europe slide into recession prices will remain low.

The flip side of this argument is that the fracking boom is likely to last a decade or two and not much longer. China, Japan and the EU will recover. The price of oil will go back up. Fundamental stock analysis tells us that oil companies that survive the current market will have excellent intrinsic value over the long run.

A Solid Approach to Investing

We wrote recently that one should not be afraid to invest in stocks. We assume that a smart investor will use fundamental stock analysis to pick winners and avoid losers. A solid approach to stock investing is to analyze stocks, wait for opportunities and let the exponential effects on accumulated gains make you rich.

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Stock Index Fund Readjustments

Index funds typically readjust their portfolios at the end of the year so that they will continue to reflect the mix of stocks and their values in the index they follow. If a stock has had an especially good, or bad, year the funds will either sell or buy shares to readjust the relative weight of that stock in the portfolio. This commonly causes a rise or fall in stock price depending on whether funds are buying or selling. Look for who has had an especially good for bad year and buy or sell accordingly for end of the year stock bargains.

Money Manager Portfolio Adjustments

Money managers like to end the year looking good to their customers. Thus they often buy or sell in order to clean up and improve the look of their portfolios. Again, look for stocks that had especially good or bad years and expect to see a small end of the year nudge up or down as portfolio managers adjust their portfolios.

Where the Market Is Going Next

The United States economy is on the mend. The annualized GDP came in at 5 percent for the last reported quarter. That is spectacular growth. According to Jim Cramer, the Mad Money guy, many stocks are winners in this sort of scenario.

“When you get this kind of gross domestic product activity, it’s just too big to ignore,” said the “Mad Money” host.

So, in response, Cramer wants to teach investors how to think like a money manager.

The perfect stock for the moment? Kimberly-Clark (KMB). This stock received numerous benefits from a big GDP number. GDP growth means that wealthy people will spend more money on better brand-name products.

The point of Cramer’s analysis is that you can predict investment and spending trends based on the amount of money flowing through the economy.

And Sectors to Avoid or Sell at Year End

Forbes reminds us that biotech stocks had a great rally in 2014. There is compelling evidence that biotech will not be strong in 2015 and could take losses.

Will the rally continue in 2015?

We cannot say for sure. What we can say is that certain favorable factors (e.g. healthcare policies, demographics and new product approvals) will provide tailwind for biotechnology stocks. At the same time, the industry will face two threats that may end up slowing down or even derailing the rally.

First is a strong US economy — GDP is growing at 5%, according to the latest government data. That could force the Federal Reserve to raise interest rates sooner rather than later.  And that could spell trouble for the sector, as it will signal an end to cheap margin-borrowed money, which has been propelling shares of some revenueless biotech companies into the stratosphere.

Then comes approval of new drugs, which creates competition for blockbuster drugs – which is expected to undermine pricing power and profitability in the industry.

Forbes and others hold up Gilead Sciences as an example. The company lost twenty percent of its value recently as a customer switched suppliers for a high tech drug.

Oil Stocks

Oil stocks have been beaten down in the last six months. It is unlikely that the price will crude will drop much farther. And, eventually, the economies in Europe, Japan and China will pick up again. This will be good for oil stocks. Business Insider thinks now is a good time to buy oil stocks.

I can’t say when oil will begin to recover or by how much. What I can say is this: For far too many investors, by the time they gain back the confidence to put money into oil stocks again, the rally might have already taken off, making it challenging to capture the full benefit of the upswing.

Oil tycoon T. Boone Pickens recently told Mad Money’s Jim Cramer that oil would return to $100 within 12 to 18 months.

The best of end of the year stock bargains may be the recently beaten down oil stocks!

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All About Macy’s

Macy’s was originally R. H. Macy & Co. and has operated its flagship store on Herald Square in New York City for over a century. It competes with the likes of Belk, Bon-Ton, Dillard’s, Nordstrom, Neiman Marcus, Lord & Taylor and Sacks Fifth Avenue. This is the company that has sponsored the annual Macy’s Thanksgiving Day Parade in New York City for 89 years. Analysis credits the company’s ability to read and stay ahead of popular culture and diverse merchandising for much of its success. Macy’s operates more than eight hundred stores in the USA and operates Bloomingdale’s as a separate division. From three hundred kiosk locations in malls across the country Macy’s sells consumer electronics. Currently Macy’s stock has a P/E ratio of 14.76 on 376 million shares. Earnings per share are $3.45. Macy’s has a $19 Billion market cap.

Is It Still Time to Buy Macy’s?

Finding a good stock investment depends on what you need to know about the stock and its market niche in order to invest intelligently. Let us look at retailing. Retail consumers can be fickle. Buyers for the likes of Macy’s need to know a year in advance that every child in the universe is going to want a Teen Age Mutant Ninja Turtle for Christmas and not a Teen Age Mutant Ninja Frog. If the company orders enough of these toys in time for the holidays it prospers. If it does not order enough or perhaps does not order any it misses out on sales and shoppers go to different stores. If it orders the wrong toy (Ninja frog) it makes no sales, has wasted money on useless merchandise, and customers flock to other stores for the hot toy (Ninja Turtle). Macy’s makes money because it and its buyers are able to stay tuned into popular culture regarding clothes, toys, cosmetics, etc., etc., etc. The ability to do this year after year after year builds a brand that people rely on and spend money on. Value based stock investing is investing in stocks that grow, stocks that pay, and stocks that last. To the extent that Macy’s can continue to predict trends and efficiently sell their products they will continue to prosper. If that is the case it is still time to buy Macy’s.

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Microsoft Value and Prospects

We think of Microsoft and we think of the Windows operating system. But just where does Microsoft make its money and how dependent is Microsoft on selling Windows operating systems for PCs? According to Microsoft SEC filings here are the results for Microsoft’s main sources of revenue.

When we look at the fact that a third of Microsoft revenue comes from Windows and Windows is not growing we can see why Microsoft rallies on news of Ballmer retirement. However, a five percent growth rate in the business category is pretty impressive considering that the economy has not fully recovered from the worst recession in 75 years. An eleven percent growth rate in servers in tools is doubly impressive. Even as the world shifts from PC’s to hand held devices Microsoft still makes software. And two thirds of its income stream shows signs of continued growth even if the Windows/software portion needs a bit of help.

Where Is Microsoft Going?

Prior to Mr. Ballmer’s announced retirement Microsoft announced that it intends to focus more strongly on hardware. In addition the company intends to reorganize so that people work on operating systems, apps, services, or devices. Some have suggested that the company is simply copying Apple in this regard. However, just as follow the leader investing can be successful so can a business succeed by copying a successful competitor.

By What Standard Do We Judge Microsoft?

Since Bill Gates retired in 2000 and Steve Ballmer took over at Microsoft share prices have been largely flat. There have been successes like Windows XP and problems like Windows Vista. Critics compare Microsoft to Google, Amazon, and Apple, each of which has grown exponentially during the last decade. The problem for Microsoft is that it missed out on a lot of opportunities that the other guys took advantage of. But if you simply look at early company growth we see a different picture. Google is only nine years old. Amazon is sixteen years old. Jobs came back to Apple fifteen years ago remaking the company. All of these companies have seen excellent growth over a decade, plus or minus. Compare this to Microsoft in its first 15 years after going public during which its stock multiplied in value about a thousand fold. Now we should look at the prospects of Apple, Amazon, and Google now that they too have become giants. As Microsoft rallies on news of Ballmer retirement we might wish to image what the picture will be at Apple, Amazon, and Google in another ten to fifteen years!

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