EARLIER this week, investment adviser Marc Faber, often referred to as Dr Doom for his contrarian views, turned up the doom dial with a prediction that the markets are set for another meltdown that could see at least 20 per cent wiped off their value.
He argued that the recent fall in markets - the US S&P 500 Index is down 7.5 per cent and Australia's ASX/S&P 200 Index is off almost 5 per cent - was not because of the so-called fiscal cliff facing the US but because corporate profits will begin to disappoint.
"The global economy will hardly grow next year or even contract, and that is the reason why stocks . . . will drop at least 20 per cent, in my view."
Faber's views are extreme, but given the stream of bad news that has enveloped 2012, they are hard to dismiss outright, particularly if applied to the growing number of Australian companies that have issued downgrades less than seven weeks before they are due to close off their books.
In the past few weeks bad news had poured out of QBE, NAB, Origin Energy, Stockland, Orica and Oil Search. There has also been problems in mining services companies, including Macmahon, Transfield and Sedgman, with a lower volume of work and cost blowouts as miners either pull back or mothball mining projects.
The issue for mining services companies is that when projects are deferred, even for a short time, the pricing on the contracts will be reset, meaning an inevitable crunch on profit margins.
Ausdrill, Boart Longyear, NRW Holdings, UGL, Bradken, Emeco, Macmahon and Sedgman have all seen their shares decimated in the past few months. More and more mining companies have started to review projects as they gauge what is going on in China.
In Australia's case, the sharemarket reached a high of about 4593 on October 19, and closed on Friday at 4342, which is equivalent to more than $60 billion of value wiped away. It is a similar story in other countries, including the US and Britain.
Simon Bond, of the broking house RBS Morgans, said the problems were many and varied, but lack of confidence was dictating the low market volumes. "We are going to see a rising cascade of companies having downgrades as costs increase and margins fall," he said. He also believes the canary in the coal mine is unemployment.
"We are a high-cost producer, and we are going to see more and more companies announce job losses, which will hurt consumer confidence," he said.
Then there are the external unknowns, including escalating tensions in the Middle East, the US budget crisis or "fiscal cliff", the Greek debt refinancing bomb that needs to be resolved, Europe's debt woes and uncertainty surrounding China.
But until Greece and the US fiscal cliff issues are resolved, shareholders will continue to sit on their hands. The US markets have been falling since President Barack Obama was returned, and the spotlight turned to the fiscal cliff.
The Republicans are playing hardball and are likely to keep doing so until the last minute, when commonsense will prevail. It has happened before, and it is likely to happen again.
But as Treasurer Wayne Swan noted in a speech on Friday, if the fiscal cliff was not resolved between Obama and the Congress, it could push the US economy back into recession.
With so much negativity pouring out of global markets, it is no wonder investors are playing it safe.
All of the above, coupled with the rise of high-frequency trading and short selling, undermines confidence.
The latest was the stem cell group Mesoblast, which was queried by the ASX on Thursday after its shares fell 21 per cent to $4.22 during the day, with more than six times the average number of shares trading hands. The company's response to the ASX was an eye opener: "Mesoblast also notes that the average trade today is less than $4000 per trade, which may imply that the trading this morning has been substantially generated as the result of high-frequency computer-generated trading patterns. While the company is unable to express a view on why trader/s may utilise high-frequency trading patterns for Mesoblast stock, the company also notes that historically there is a significant proportion of share lending in Mesoblast stock - which means at some point traders who have borrowed Mesoblast shares may seek to position themselves to be able to cover that short trading."
The only bright spot is the lower interest rates and the prospect of even lower rates. This is positive for equities, especially defensive stocks such as Telstra, listed property trusts, the banks and utilities. It also explains the rise in investor appetite for companies offering high payouts and high dividend yields as well as hybrids. These stocks have all outperformed the overall market. To ensure this continues, some companies during the profit and AGM season placed a strong emphasis on dividend growth in their outlook statements.
Companies that disappointed on the dividend front were punished accordingly.
Growth versus yield is an issue that BHP Billiton has been grappling with as investors pressure the board to move from a growth stock to a yield play. The way investors see it, mining companies have just come through a mining boom, yet stocks such as BHP did not show much share price growth.
Investors want security. They also want to be able to invest in companies with good returns. Many factors contribute to a company's earnings and share price performance, including external factors such as currency movements, cost pressures, structural changes, high-frequency trading, a slowing economy and fragile confidence. Let's not forget the impact of poor management, weak boards and a deficient strategy on a company's performance.
All too often, profit downgrades, asset writedowns and fire sales can be laid at the feet of the company itself. As Simon Bond said: "My prediction is that we are in a low interest rate and deflationary environment for the foreseeable future, and we need to tilt our investments towards new windmills." Or at the very least demand better boards and management.