Without empirical proof, I’ve often surmised that the higher a country’s effective tax rates (i.e., income-tax rates plus social-security contributions), the lower the country’s stock market appreciation. So I decided to check in on the hypothesis with a variety of country ETFs.

Italy, Sweden, France and Germany are among the most taxed. One emerging market makes that list as well… India. On the flip side, Spain, Japan, Switzerland and the U.S. are among the least taxed. The biggest emerger makes the least-taxed list as well… China.

You may have been reading about the latest "rage." More specifically, several prospective fund providers are gearing up to offer actively managed exchange-traded funds.

In previous posts, I have argued AGAINST using newfangled, actively managed ETFs. For one thing, you lose the tax efficiency and lower costs that come with index ETFs. What's more, index ETFs are more "trade-able." The exceptionally low volume on actively managed ETFs adversely impacts price execution, resulting in an unnecessary hit to overall performance.

By Irwin Greenstein

New labor laws in China have forced the manufacturing sector into an ever-tightening vice, giving investors further pause for any significant rebound in the world’s fastest growing economy.

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On the surface, China’s actions in stimulating its economy may look to some as a modestly positive development. However, such thinking misses the larger point.

Emerging economies are beginning to show a willingness to take the global growth lead. By seeking to generate domestic demand (which is what their stimulus package is designed to target), China is showing the way for other well- capitalized emerging economies to take control of their own economic destiny: Depend less on exports to the developed countries and their overburdened consumers and more on their own emergent middle class for growth and stability. In the process, emerging economies will be a central part to a world economic transformation that will usher in a new, more sustained era of global growth that is difficult to impossible for many to see through the current haze of the credit crisis.

For many months, this was the recession that wasn’t, as many key cyclical indicators refused to roll over as expected. That is no longer the case, as virtually all data is headed down at an almost blinding pace. Yesterday’s ISM release is a perfect example; the headline number made a key move well below 50 in September, and extended that decline to 38.9 in October to the lowest level since 1983.

The details were even worse.

During the past month, the S&P 500 (SPY) has been up over 4% besting every country ETF, with the exception of India which has come alive after its government survived a no confidence vote over the US-India nuclear deal.

And while the S&P 500 has fallen 12% year to date, Brazil has fallen by 15%, Russia and India by over 20%, and China’s Shanghai Composite by close to 60%.

Investors are getting bearish these days, which comes as a surprise to me, since I'm used to being in the minority.  I was a bear when I first took the leap from mutual funds and started trading stocks in 1999, and am a bear still.  I wish I'd turned bullish for a couple of years at what I consider to be the large bear market recovery of 2003-2006, but I didn't.  However, since I was (and still am) bullish on commodities since around the same time frame, I can't complain about my returns over the period.

This spring, I was more bearish than usual, which is why I brought you my ideas for stocks to buy when you think we've hit bottom, and some very un-green stocks to consider shorting.  With it becoming clearer and clearer that GM (GM), Ford (F), and Chrysler are in serious trouble from high oil prices, while the Airlines are going from bad to worse, I only wish I had been less cautious about advocating shorting these industries than I was, and also that I'd been willing to take bigger risks myself.

I found this article in the Telegraph warning of a possible meltdown in emerging markets caused by what looks like looming inflation problems.

Back in January, in the opening session at Davos, Yu Yongding sounded a warning.

Yu also noted political risks in China: There are 150 million small Chinese stock-market investors who are going to be very angry if and when the Chinese stock-market bubble bursts. "They were hopeful that they could regain their money, and then they lost more," he said.

Economic reforms that started in 1978 have helped lift 635 million Chinese people out of poverty, from 839 million in 1981 to 204 million in 2005 (see chart above), according to this study (Table 2). The poverty rate has fallen from 53% of the population in 1981 to 8% by 2001 (see chart above from the World Bank).

Everyone seems to have an opinion on China - their people, the government, the economy and the markets.

After reading so much about it, I decided to invest the money and time (2 weeks) to go see it and feel it for myself.

Brazil ETFs
iShares MSCI Brazil Index Fund (EWZ)

Money Morning Investment Director Keith Fitz-Gerald has been leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part V of a short series detailing his observations and discoveries.

Western investors have always had two major problems when it comes to China.

Money Morning Investment Director Keith Fitz-Gerald has been leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part V of a short series detailing his observations and discoveries.

The question came to me as I was standing on the floor of the Hong Kong Stock Exchange here. I’d be willing to wager that quite a few investors - both within China and back in the United States - are wondering about this, as well.

Bad earnings were blamed for the poor start to the trading week, with the SSE Composite down 2.33% today. Even Jim Rogers, who said over the weekend that he was scooping up Chinese stocks now that they were cheap again, was not able to psych the market up, and he is much quoted and admired among small investors here in China. Rumors continue to swirl about additional measures to help prop up the market, but I suspect the failure of Wednesday’s cut in the stamp tax to sustain a rally will have seriously dampened the credibility of future administrative moves to strengthen the market.

There is not a whole lot of interesting news today, as far as I can see, and I have been too busy recently to write about an analysis my assistant Shang Ning did on debt levels among Chinese corporates, but I do plan to do so soon. What small thing worth noting: China Daily has an article today (“Yuan appreciation dampens textile export”) that discusses how the rise of the RMB has hurt textile exporters, at least according to preliminary reports from textile firms wooing foreign buyers at the 2008 International Textile, Fabrics and Accessories Exhibition held recently in Zhejiang Province. The article blames the rising RMB for the lack of orders, although given that they quote an Austrian businessman who complains about rising material and labor cost – and of course as a Eurozone country Austria has not seen any RMB appreciation at all – I would argue that the article confuses the impact of rising labor costs in China with the RMB’s appreciation against the dollar. I suspect that this article is part of the internecine fighting among the growth and monetary guys vying over an explanation of what ails China.

From its peak on October 16th to its low last Friday, China's Shanghai Composite was down 49.2%. This decline is the worst bear market for Chinese equities since at least 1995 (the index began in 1990, but we only have price data back to 1995).

As shown in the table of bull and bear markets below, the average Shanghai bear sees a decline of 32.91% and lasts 166 calendar days. The bull market that preceded the current bear was also the biggest rally for the index since 1995 (+502%). The more they go up, the harder they fall. And just in time for the Olympics.

Since peaking on October 16, 2007, China's Shanghai Composite has fallen 40.8% over a period of 109 trading days.

To put these losses into perspective, we plotted the Shanghai Composite's declines along with the declines of the S&P 500 during its nasty bear market from March 2000 to October 2002. As shown below, the S&P 500 didn't hit -40.8% until the index was very close to its bottom in 2002, and at its low, the S&P 500 was down 49.1%.

It's probably fair to say that the most important diplomatic relationship in the world is between the U.S. and China. Unfortunately, the relationship is souring and could get much worse. "Alas, the U.S. is mostly to blame for this," said Nicholas Kristof in a New York Times column. "There are plenty of legitimate reasons to be angry with China's leaders, but its trade success and exchange rate policy are not among them. The country that is distorting global capital flows and destabilizing the world economy is not China but the U.S." He adds: "American fiscal recklessness is a genuine international problem, while blaming Chinese for making shoes efficiently amounts to a protectionist assault on the global trade system."

China has been a convenient scapegoat for politicians, and now China is being blamed for exporting inflation. Is this political spin, or is there a real danger of higher inflation being imported from China? Why are some so eager to blame the Chinese for higher inflation when the Fed's policies could be to blame for rising prices?