What a difference a week can make. Last quarter the glass was cracked; last week it was half empty and yet seven days later it appears half full! Certain analysts have been getting quite excited with one of Goldman's analysts (presumably still celebrating his bonus) stating that the S&P500 would enjoy its “best second half rally since 1982”. As a result they have boosted their forecast for the Index and are predicting a rise from its 30th June close of 919.32 by 15% to 1,060 by 31st December. This level of excitement even led to the Daily Telegraph highlighting that the FTSE had had its best run in 4 years! Yes absolutely stupendous taking us back to exactly where we were last month at around 4480, and the previous month and February and December. I think we could call that range trading! (N.B. Just for reference the FTSE achieved the most recent intra-day high of 6574 on 9th July 2007.)

This is a very bullish stance from Goldman's as we head into the Summer trading lulls followed by the months of usual Autumnal market storms. The question is - has the market discounted all the bad corporate news and is now starting to look through the difficulties to a more encouraging period of modest growth after the end of the technical recession?

Certainly a lot of bad news has been absorbed, but I wonder whether some are just being too optimistic about the strength of any recovery. The US, with its greater strength and depth, is no doubt going to be in a better position than the UK domestic economy, but there is still little room for confidence of any sustained recovery after such a huge destruction of housing, investment and banking value - as well as confidence. But that has never stopped the Yanks before.

One pattern that is emerging from the rush of recent corporate results has been the picture of not especially bad, and even quite encouraging, bottom line figures but with poorer top line sales and income figures. What this seems to show is companies stripping back the bark by cutting costs which will of course have a positive impact initially, but is not a recipe for any form of sustained positive growth in company profits - strip off too much bark and you end up killing the tree.

However, there have been some positive areas such as infrastructure expenditure which has been a clear beneficiary as we saw with both GE and Caterpillar, and some great tech products like iPhones which will sell even in bad times.

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I mentioned last week the growth of the Bank of China into the UK domestic mortgage market, but there are other movements by the Chinese which I see also as being potentially more interesting strategic developments and investments. As you will recall China is sitting on reserves of an equivalent of over $2.132 billion. Over the past few months there has been a growing criticism from some quarters that such reserves in China and other nations with similar albeit smaller reserves, need to be playing their part in the global recovery by recycling these funds and not just hoarding them.In fact the Chinese authorities through the People's Bank of China have been quietly building up strategic holdings in various assets. Most recently they have acquired 1.1% of Diageo, who sees that nation as one of its key export markets for the future. This holding will sit alongside 0.5% of Tesco and other publicly quoted investments - including BP which is held by other Chinese bodies.

Obviously such buying will provide a support and prop for certain stock prices and the market will be keen to encourage such an eager purchaser - especially at a time when normal investors have been scared away.

However, the Chinese authorities are not immune from all the investment concerns. The auction of government bonds has become a source of nervousness for both the Americans and the British as both fear that there may be further worries from investors who may become less enthusiastic to buy their paper. Now the same malaise is affecting the Chinese.

Earlier this month the Chinese failed to attract enough interest from bidders for the second time in a week as investors raised concerns that record bank lending might spark inflation in the world's third largest economy. The concern was really related to Premier Wen Jiabao's huge stimulus package and what impact it could have in creating price bubbles in stock and housing markets, which could in turn force the central bank to tighten monetary policy.

The stimulus package has had a rippling effect around the region and even affected shipping rates, however there is still a question over how sustainable any of the effects of the package might actually be.

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And finally............never knowingly willing to avoid a controversial elephant trap, Boris Johnson, who writes one single column each week for The Daily Telegraph described recently the pay for his endeavours as “chicken feed”. He is paid £250,000 by The Telegraph - some chicken - and presumably a quite over-fed one at that rate!

...........and another item that would no doubt also be described as “chicken feed” by some is the cost of the development of “Civil Pages” which apparently has been described as the “Facebook for Civil Servants”. This will provide a social networking site solely for those unfortunate and lonely civil servants. Cost to date £1 million. Streuth - they are not supposed to be socialising but working! Or is that too old fashioned a concept?

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

Seven Investment Management Limited