Jeremy Warner's Outlook: Debt-laden chief executives struggle to convince that all is fine on the ranch

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The Independent Online

Why won't investors believe us? At City lunch tables, this is becoming the overwhelming complaint among beleaguered chief executives. They seem to be delivering as promised, yet the share price keeps falling.

It's been like this for nearly a year now. Management puts out a statement saying that trading is just fine and it knows of no reason for the fall in the share price, yet the stock market reacts with incredulity and marks the shares down even further. Whatever happened to trust? It seems that it went out the door with the banking crisis.

The latest company to fall foul of the unbelieved trading update is Debenhams. We've had enough of all this knocking copy, Robert Templeman, the chief executive, seemed to say as he rushed out a trading update more than a week early to counter the maelstrom of negative chatter.

The update seems to suggest that trading fears are misplaced, with sales ahead of expectations and margin guidance unchanged. What's more, the company remains strongly cash-generative and is proceeding as planned with paying down debt. After the drubbing the share price has suffered in recent months, you would have thought such reassurance would result in a sharp rebound. Not a bit of it. The shares struggled to hold on to a 2.5p gain. Punch Taverns yesterday responded likewise by bringing forward its trading update after the publication of a broker's note which suggested a rescue rights issue and the axing of the dividend.

In fact, says the company, it is confident of meeting market expectations and the balance sheet remains strong with no danger of a breach of covenants. The statement was issued after the stock market closed, but, if Debenhams is anything to go by, investors are in no mood to listen.

What's spooking both these stocks and others like them is that they've got lots of either straight or securitised debt. They may be all right at the moment, but if there is a recession then all bets are off, and they'll struggle to support the loans as required. Lack of transparency on the terms of banking covenants and securitised debt is further undermining confidence. These fears may be misplaced, but, as we have discovered with the banking sector, the stock market has a nasty habit of being right.

For months, there was similar denial from the banks. Trading was said to be fine, the effect of the sub-prime meltdown much exaggerated and there was certainly no need for additional capital. Then it turned out that profits had indeed been wiped out by the sub-prime debacle. Ever since, banks have been falling over each other to recapitalise in preparation for what most of them now concede will be difficult times ahead.

Obviously there is a now quite high risk that the same thing will happen with other sectors. Housebuilding is already going the way of the banks, with retailing and leisure fast following up the rear.

All that said, the short-selling hedgies hardly help matters. With sentiment so negative, they have the opportunity to clean up, and they've grabbed it with both hands. Many chief executives refuse to believe that the extreme short positions some hedge funds run are only a reflection of the fundamentals. Instead the Mayfair brigade is accused of trying to create a self-fulfilling prophecy.

When things get as wild as they are now, the speculators always get blamed, and, by pushing things too far, they also eventually get punished by provoking a regulatory backlash. Last week's new disclosure rules for short selling from the FSA are only just the start.

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