Barometer's strangely sunny view

Feeling prosperous this morning? Family finances on the up? Well you certainly should be, at least according to one orthodox measure - the FTSE 100 index of top UK companies.

This benchmark stock indicator is routinely referred to as a barometer of corporate Britain. Yesterday it pushed up through 5500 before closing just shy of this psychologically significant level, up 38.9 at 5498.9. In broad terms the Footsie is showing its best form since the summer of 2001 - before the 9/11 terror attacks poleaxed confidence.

Of course, the top 100 is not really a barometer for corporate Britain; essentially it is a measure of how well a couple of dozen truly global companies (which happen to be registered in Britain) are judged to be performing. Big oil firms, including BP and Shell, speak for a fifth of the index; big miners, such as Rio Tinto and Anglo American, speak for another chunk, as do banks such as the Royal Bank of Scotland and HSBC.

Still, the market's strength is good news for Britain's savers since most collective investment vehicles are in some way linked to the various FTSE indices. A return to the glory market days of 1999 and early 2000 may still be a long way off, but the sort of moves we have seen over the past month or so really are helping to solve the pensions crisis.

Should we be celebrating this, or should we be warning here about the impending bursting of Bubble 2.0?

It is quite difficult to say, since the overall strength of the equity market is being driven by a string of separate (and sometimes contradictory) factors.

Take the oil price: this was somehow "good" for the Footsie when it was going up because of the size of BP and Shell and yet it's also "good" now because firms such as British Airways are still charging fuel surcharges and therefore raking in windfall profits.

Similarly, the fact that the next move in British interest rates is expected to be down is supposedly helping to send the market higher, when in the US the cost of borrowing is going up. Since about 50% of earnings by British corporates come in the form of dollars, that should be "bad news", except that the dollar's strength against the euro (in particular) and sterling is lifting reported profits.

Meanwhile, the actual reporting of profits has led to a jackknife reaction from investors if those profits are not exactly what was expected - just look at Vodafone this week.

And we have not even begun here to factor in the merger mania sweeping corporate Britain. Aside from Footsie targets such as O2 and BPB, the most notable infection has been among the second liners: the FTSE Mid-250 index has risen 5.5% in the space of a month.

Confused? So are we.

Buying friends

Sir Fred Goodwin, chief executive of Royal Bank of Scotland, has grown accustomed to being called names during his business life. To many, he is "The Shred" as a result of his ruthless reputation for slashing jobs to cut costs. No doubt he would rather be remembered as businessman of the year, a title he was awarded three years ago by Forbes magazine. More recently, he has been dubbed a megalomaniac by investors convinced he is obsessed by doing deals.

A glance at RBS's share price quickly explains the frustration with the boss. The shares have lagged behind their peers since at least 2003 and continue to find few friends among investors.

There is, though, a subtle mood change under way. A string of brokers' notes in recent weeks have started to suggest that RBS may soon be able to do something to please shareholders: hand them some cash. For the first time in recent memory - and at least since the current chairman Sir George Mathewson joined the board in 1987 - there is talk about the possibility of a share buy-back. Merrill Lynch and Dresdner Kleinwort Wasserstein are proponents of the buy-back theory while Lehman Brothers notes that any surplus cash could be doled out via a buy-back or higher dividend.

A return of cash - even if it is in 2007 as some analysts predict - would be music to the ears of investors, who would see it as a brake being applied to future deal-making after the unpopular £900m acquisition of a 5% stake in Bank of China. Goodwin, who is still trying to find a finance director to replace Fred Watts - who announced plans to leave six months ago - certainly needs to hope the mood swing gains some momentum. He is part of a management team that has turned RBS from a Scottish provincial bank to the fifth largest in the world in terms of stock market value. Yet he currently receives little applause for his endeavours.

By returning cash to investors, Goodwin could be buying his future at RBS. Investors are running out of patience. Any signal on December 8, the day of the bank's next trading update, could help to quell some of the disquiet.