Market Figures Out…Fed No Longer Has Its Back

US stocks soared while the Fed was meeting to raise interest rates this week -- though it's not clear why that should be so since monetary tightening isn't generally a good thing for stock prices.

In any event, it didn't last. Over the past 48 hours the Dow is down more than 3%, with many, many individual stocks down far more.

Why the quick reversal? For one thing, that's pretty much how it always goes. The Fed tends to aim its statements directly at traders, who are so desperate for adult supervision that they can't help responding positively. But when the Fed goes quiet, reality once again bites, and the general trend turns negative.

That it's happening so quickly is a sign of how different things are this time around.

The Fed is now -- for the first time in adult memory for half the world's traders and money managers -- tightening rather than loosening monetary conditions. A quick look at financial history is all it takes to lead anyone with leveraged money at risk to lighten up.

Equally important -- and vastly more strange when you think about it -- this tightening comes at a time when major parts of the global economy are either grinding to a halt or imploding. See Torrent Of Bad News Greets Fed As It Prepares to Raise Rates for some of the disturbing events reported while the Fed was meeting.

And since then (that is, in just two days), a whole new series of similarly-scary stories have surfaced, including:

China Beige Book Shows 'Disturbing' Economic Deterioration

(Bloomberg) - China's economic conditions deteriorated across the board in the fourth quarter, according to a private survey from a New York-based research group that contrasted with recent official indicators that signaled some stabilization in the country's slowdown.

National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months, according to the fourth-quarter China Beige Book, published by CBB International. The indicator is modeled on the survey compiled by the Federal Reserve on the U.S. economy, and was first published in 2012.

The world's second-largest economy lacks the kind of comprehensive data available on developed nations, making it harder for investors to get a clear read -- particularly as China transitions from reliance on manufacturing and investment toward services and consumption. Official data on industrial production, retail sales and fixed-asset investment all exceeded forecasts for November, while consumer inflation perked up and a slide in imports moderated.

Earnings Deterioration

The Beige Book's profit reading is "particularly disturbing," with the share of firms reporting earnings gains slipping to the lowest level recorded, CBB President Leland Miller wrote in the release. While retail and real estate held up reasonably well, manufacturing and services performed poorly, with revenues, employment, capital expenditure and profits weakening.

The survey shows "pervasive weakness," Miller wrote in the report. "The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true."

Japan's November Exports Fell 3.3%

(Khaleej Times) - Japan's exports in November fell at the fastest pace in almost three years as shipments to Asia declined in a worrying sign that weakness in overseas demand could curb economic growth.

Japan's gross domestic product is likely to avoid a contraction for the time being as domestic demand has performed better than expected, but declining exports highlight the risks that China's slowdown and turmoil in emerging markets pose to the outlook.

Ministry of Finance data showed on Thursday that exports fell 3.3 percent in November from a year earlier, more than the median estimate for a 1.5 percent annual decline in a Reuters poll. That was the biggest decline since a 5.8 percent year-on-year fall in December 2012.

Hedge Funds Just Had Their Worst Quarter Since the Crisis

(Bloomberg) - Hedge fund closures surged in the three months to the end of September as money managers reeled from declines in commodity and equity markets, while high-yield credit spreads widened.

The number of funds liquidated climbed to 257, up from 200 in the previous three months, according to a report from Hedge Fund Research Inc. on Friday, and taking total closures in the first nine months to 674, compared with 661 during the same period last year. Cargill Inc.'s Black River Asset Management shut four units, while Armajaro Asset Management LLP also closed one of its funds.

Liquidations rose "as investor risk tolerance fell sharply, and energy commodities and equities posted sharp declines, resulting in net capital outflows, wider performance dispersion and meaningful differentiation between hedge funds," Kenneth Heinz, president of HFR, said in a statement.

Bond funds see record outflows after junk jitters

(CNBC) - Investor fears about liquidity in junk bonds have leaked into the investment grade sector of the market, with redemptions from corporate bond funds hitting record highs in the week running up to the Federal Reserve meeting.

Global bond funds saw their largest outflows since June 2013 in the week to Wednesday 16th December, with some $13 billion being pulled from the sector, including, high-yield and investment-grade strategies.

BofAML said the "carnage in fixed income" was still focused on junk bond funds, which saw $5.3 billion of the outflows. Meanwhile, corporate investment-grade debt funds saw around $4.8 billion in net redemptions, according to separate data from Thomson Reuters Lipper which also showed that the net outflows from bond funds over the period were the largest weekly outflows since Lipper started tracking fund flow data in 1992.

There's more, but you get the point. These are the kinds of things that happen in the early stages of recession, not the middle of an expansion. As such, they're usually signals to a central bank to ease conditions.

But the Fed has locked itself into tightening for a while, and will need a serious crisis to make a change of course possible. That's what the markets are figuring out, that they can't count on free money falling from the sky in the next couple of months, no matter what happens.

So, for the first time in a long time, they're responding to fundamentals rather than artificial easy money. And the fundamentals, by any historical or common sense standard, are terrible.

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Courtesy of John Rubino from Dollar Collapse