Market doubts are setting in again after significant losses at the world’s leading insurer and the biggest profit drop in five years at the world’s second largest auto manufacturer.

American International Group (AIG) recorded a Q2 deficit of $5.36 billion after losing $5.56 billion in credit default swaps and $6.08 billion in write-downs of other investments. This is the third consecutive quarterly loss during which AIG has lost more than $25 billion to credit default swaps and more than $15 billion in other investments, all figures pre-tax.

At Toyota (TM), global net income fell -28% to $3.2 billion in Q2, which is the worst performance in 5 years. Sales dropped -4.7%. Operating profit (sales minus cost of goods sold and selling, general and administrative expenses) dropped -39% globally and -57% in North America. Although the stronger yen cut profit by almost half, Toyota is facing the same economically challenging conditions in the world that most consumer-based businesses are.

Yesterday in US equity market trading, the DJIA (+40.30 +0.35% to 11656.07), S&P Composite (+4.31 +0.34% to 1289.19) and NASDAQ Composite (+28.54 +1.21% to 2378.37) all lifted, but the enthusiasm was muted. The market Bulls were happy to consolidate the previous day’s gains.

Leading the market higher were the Energy (XLE +2.3%) and Industrial (XLI +1.9%) sectors. Financials (XLF -1.0%) and Consumer Discretionary (XLY -0.5%) pulled back.

The Toronto Exchange (+1.74% to 13453.51) and Venture Board (+0.28% to 2148.46) were higher, with the Venture stocks reversing the prior day’s loss of -4.8%.

The $USD gained +0.46% to $0.7425, while the Euro dropped -0.29% to 1.5408. $GOLD dropped -$3.10/oz to 883.00 and Crude Oil ($WTIC) slid -$0.59/bbl to 118.58.

Nevertheless, in extreme Cara 100 trading, where the volume was very low, the winners on the day were commodity stocks VCP +8.6% and SLW +8.3% as well as GRMN +8.1% and CSCO +5.7%. The big loser was WFMI -12.6%. Silver Wheaton (SLW) had dropped -11.3% the previous day, so despite no real change in the silver price on the day, traders decided the value is there in the leveraged equity, which may be a mistake.

The Bank of England [BoE] and European Central Bank [ECB] will announce their monetary policy in minutes, expected to remain constant, but with hard language against inflation. Commodity prices may sink further.

Overnight, Australia’s All Ords index (+0.24% to 5030.0); Shanghai (+0.30% to 2727.6); Hong Kong’s Hang Seng (+0.70% to 22104.2); and India’s Sensex (+0.29% to 15117.3) all moved a bit higher, while Japan’s Nikkei (-0.98% to 13124.99) sank under economic growth concerns.

At about 7:00am ET (1200 GMT) in Europe: the French CAC was up +1.10% to 4497; the German DAX up +0.32% to 6583; and the UK FTSE up +0.44% to 5510. Traders await the momentary report by the two major central banks releasing their policy statements. The BoE has just reported no change and the Pound/USD has weakened a bit.

The DJIA futures are at 11586 (-45), which indicates a soft open, following today’s nervousness caused by the very negative AIG report.

This morning the $USD futures are up over yesterday to $0.7422, but a little weaker in the morning, and Euro/USD is a tad stronger early today at 1.5437, with little movement ahead of the ECB report. Crude Oil is stronger, up to 120.01.

The precious metals spot prices haven’t moved much for three days in a row: gold, palladium, platinum and silver at 7:08am ET are 882.52, 351, 1605, and 16.555. Only platinum has moved higher, likely in response to the Xstrata [LSE:XTA] bid for Lonmin [LSE:LMI].

Comments and Outlook

There are some interesting developments in capital markets Yesterday, Freddie Mac CEO Syron told CNBC media that his decisions have been the ones traders should have expected him to make and that to see it otherwise is hindsight. He cited legal requirements to stay the policies, but others are questioning his decisions. PIMCO’s Bill Gross was interviewed by Bloomberg, saying that the US Treasury was likely to buy $30 billion in preferred shares, which Syron denied. There is a lot of vested interests involved in this battle. At the end of the day, traders ought to be very suspicious of the words of Bill Gross and the role that PIMCO/Greenspan is playing as a mover and shaker for CNBC/Bloomberg.

I note that banks are investing in mortgage hedge funds, which I think is a strategy to sustain the dubious high asset values on their books. Where else did Blackstone get $2 billion to buy up mortgages from the banks? This is like a dog chasing its tail. Nothing positive will come of it.

Yesterday, BMO’s Don Coxe had it flat out wrong when he told Maria Bartiromo of CNBC that the rush into financial assets was the causative factor for the crushing of commodity prices. No, Don, commodity prices are collapsing because the consumer-driven economies in North America, Europe and Japan hit the wall. Look at the drop in home prices in the US and today as reported in the UK. This is happening through Europe and elsewhere too. The consumer wealth effect that drove commodity prices higher is now operating in reverse, thanks to housing.

Finally, we are one day from the official open of the Chinese Olympic Games, a proud moment for China, to start on the most popular Chinese number—triple-8—08-08-08. Hopefully the Games will go off with the focus on sport and not politics and business. If only that could be. But, CNBC global audiences are going to get an earful from the parent company General Electric. GE is spending a fortune on their involvement and promotion of these Games. As you know, the Olympics are mostly driven by vested interests in big business and government. I’ll bet you that the name General Electric comes up more than say Germany!

We’ll also be told, non-stop I expect, that the commodity market will boom again because China is growing so quickly, yada yada. This won’t hurt commodity prices for a couple weeks, I guess.

Anyway, I’ll be watching early tomorrow morning, and for the next couple weeks. It’s a good diversion from the market.

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Bill Cara

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