Meanwhile, back at the office, I am consulting with one of the most important people in my network, X. We are talking about a few different ways that quant traders at Goldman Sachs are making money right now. The number one trade over at the trader’s pit of government workers — Goldman — is gunning the S&P higher by going long the euro yen spread against the dollar. Thanks to the overweight of euros to yen in the dollar index, as you buy EURJPY with dollars, the dollar is pushed lower, and the S&P higher. As soon as this structure is in place, you lever long S&Ps.

These are the trades that are making Goldman’s trading stats so good right here and now — a tremendous record to say the least. I know tons of traders over at Goldie, and we speak on a regular basis. Some of them are my very good friends. Speaking to one of them the other night, I said, “Your track record is really good.” If nothing else, good trader’s know that the tape can be very humbling. He agreed.

Sometimes when trading records are too good — like with Enron — no one asks the right questions until it is too late. Whatever happens, I hope my trader pals at Goldie will be all right.

After that, we recapped today’s scores.

The S&P 500 is up 16.5% YTD and was up 3.29 points or .31% today.

The move higher in gold continued. The only bearish thing I can ask about gold is this: if the price index numbers released today were more inflationary than expected, why was gold not up even more? Other than that, it seems like the move in gold is holding and strengthening. One miner of note — Newmount (NEM) — sold bonds in exchange for $2 billion dollars ($900 million senior notes 5.125% due 2019 and $1.1 billion of 6.250% due 2039). The raise was 8.7% of the companies market cap. The smartest traders of gold are likely the miners themselves. It is notable that more than one of them is raising cash — through one mechanism or another.

If you are watching the scores all day, be sure that the symbols of the big five (Citigroup, AIG, Citi, Fannie and Freddie) are on your screen. Those five are making up 30% of the volume in today’s exchange of cash for shares. It was reported today that the US government may sell it’s 34% stake in Citigroup (C) over the next 6-8 months, starting as early as October. The government would not be announcing selling their stake unless they could show a trading profit. I’d think if the US government is selling, they won’t be selling into a down tape.

As I write, The Financial Times is reporting that some of Lehman Brothers’ creditors are challenging the sale to Barclays. They are claiming that up to $8 billion in cash and securities was transferred without the court’s knowledge!

At the same time, Warren Buffet is on sports television talking about Lehman one year ago. The sensationalism of the crash of 2008 is at all time highs, but momentum markets are tough to fade.

And the beat goes on.

A generally quiet session with some action, but not much. The S&P closed about flat at -1.41 or -.14%.

Overall, something seems not right with the market. Whatever that is may pass or it may lead to further volatility. As of now, there doesn’t seem to be an argument in town that can stop this thing. To that end, the S&P could potentially soar from here. All things are possible.

If the S&P does continue it’s ferocious march, it is VERY tough to know what to buy up here. Most of the breakouts I am seeing are concentrated in the stocks under $5 bin–the junk.

Gold seems to be on everyone’s radar. This is good. In a bull movement, it is best to have lots and lots of players interested in a market, betting on it as the next big thing. Good bull markets are born of enthusiastic participation. Whether the next 10% move in gold is to be up or down remains to be seen. Stay tuned. Spot gold closed the week at a high not seen since the week of March 17,2008 for a $1,004.86.

Treasuries were up slightly on the week. Treasury rates may find support here, but for my money, they must eventually head lower. That said, next week’s move in anyone’s call.

10 Year Rates

The S&P moved higher out of the gate. About midway through the session, it sold off about 10 points and found support at yesterday’s high. The pit was quiet all day, save a few minutes before and after the Fed beige book was released.

S&P Futures - 15 Minute

On the daily chart, the market has rebounded from it’s (ever so slight) sell off last week. Over the last four sessions, there has been a relative increase in volume in the pit traded contract. Any time volume veers from it’s average, it is worth noting.

S&P Pit Contract - Daily

All eyes are still on gold, which is consolidating after last week’s ascent.

Spot Gold

I am flying home from Singapore and will be back tomorrow.

And that’s a rap.

Volumes dropped to their lowest levels of the week today on the NYSE and the NASDAQ as traders hit the eject button earlier than normal ahead of the three day weekend in the US.

The S&P futures closed near their highs of the day as well as at the 50% retracement level from the highs of the week. The pit traded S&P showed a pick up in volume that was not seen in the e-mini contract.

S&P Pit Contract - Daily Chart

Gold traded within yesterday’s range and closed near the highs (but just below the $1,000 barrier). Traders continue to ponder the move in gold — whether it’s a fake out or breakout.

I spoke to several trading desks today. Not surprisingly, our conversations quickly veered to gold. From what I gathered, because of the sudden interest — be it a squeeze or not — traders are buying gold now and planning to ask questions later — a strategy that has a tendency to bite back hard if things don’t work out as planned.

Fed fund futures are pricing a 1.5% chance (extremely unlikely) of a fed funds rate rise by the December FOMC meeting, which could be the catalyst behind the sudden spike in gold prices. The longer the fed waits to raise rates, the larger the inflation problem will be.

For the time being, I reside in the deflation (versus inflation) camp. If gold does break above $1,000 and holds the line, I’ll buy gold futures faster than I can blink. My deflationary thesis is fundamental. A breakout in gold would be technical. When in doubt, I typically run with the technicals. Further, being long gold against my short equity/short commodity exposure will provide a decent hedge, which is not to imply that I am a fan of running a hedged portfolio.

Gold Futures - 15 Minute

Markets are closed in the states Monday, so I am jetting off to China in the next couple of hours to catch the Monday session in Shanghai. If I see anything worth pointing out, you’ll be the first to know.

And that’s a rap.

The machines jammed the e-mini futures contract above yesterday’s highs in the evening session last night. The rally soon fizzled when at around 8:30 AM EST this morning the socialized Manhattan bankers arrived at their proprietary (prop) desk trading turrets—the only sources of profits left in what was once known as investment banking.

When prop trading accounts for the bulk (if not the entirety) of ones revenues, how can the corporate charter retain the title Investment Bank? Perhaps it is time to revise such charters to reflect what they really are—socialized hedge funds. Unfortunately, prop trading models work brilliantly, until they don’t. Now that prop trading is broken, the already collectivist banks will become systemically more socialized thanks to the secondaries being sold to the public via the shilling on CNBC.

Case in Point: As I write, Morgan Stanley (MS) is out with a $2 billion dollar secondary offering announcement. Not to be outdone by the competition, Wells Fargo (WFC) had already announced a $6 billion dollar secondary. Scary. But not quite as ominous as the $6 billion Dow Chemical (DOW) debt offering.

But I digress.

Once US investment bank prop traders arrived at their desks, S&P futures sold off all day until the magical last half hour of equities trading. Then the machines (naturally) seized their opportunity to force up the futures a quick 12 points in about 30 minutes. The S&P and the Euro moved in tandem as the chart below illustrates. The Euro did not fluctuate as strongly as the S&P. The e-mini contract is where the wildest action was, as prop desks still live under the delusion that their quantitative models exploit some sort of edge.

S&P 500 (top) Euro (bottom)

The 1PM EST bond auction results sent the bond reeling and out of the range previously mentioned here at Trade the Picture.

Being long Treasury Note calls is my current “outlier” postulation of the year. This trade will work because a) mortgage rates need to stay low and they cannot if Treasuries don’t rally, and b) Treasuries move in tandem with the Volatility Index ($VIX). Restating my restatement: the Fed will squeeze the bond higher to maintain low interest (mortgage) rates, or else market volatility will return and a flight to safety will push the bond higher. Either way, it looks like a win-win for Mr. Volatility.

Other items of note:

The “Upgrade of the Day” award goes to none other than Morgan Stanley (MS) for promoting Bank of America (BAC) and awarding it a $25 price target. Look for some reciprocity in the days to come. Very likely, (BAC) will soon be handing out the promotions—promotions Morgan urgently needs given the fact they have $2 billion of equity to sell to the public.

When news of the (MS) secondary hit the wire I reached for my Bloomberg terminal to see which earthly investment bank would underwrite such an offering. The headline read to the effect of “Morgan Stanley & Co. Incorporated will serve as the sole book-runner for the offering.” Given they are representing themselves, there obviously won’t be a conflict of interest.

Speaking more to the point of secondaries, I’d like to grant a (dis)honorable mention to Jim Cramer who advised viewers that—since he’d potentially like to invest his personal charitable trust into the the ubiquitous secondaries flying all over Wall Street—they too should put their hard earned dollars into such deals. By talking his own book that doesn’t even exist due to trading restrictions, Jim sure has reserved himself a seat in the Wall Street shill hall of fame.

The quote of the day goes to Rick Santelli (see video below) who actually drew a chart on live TV today to explain where current economic policy will lead:

“We are using future revenues to fix the hole today, so we’re going to be carrying a trailer load up a hill for the next several years.”

Rick remains one of the few people on television to whom it is worthwhile listening.

Peace