Condor Options

Back on October 9, we asked whether the TED spread is the new VIX:

At this moment, the TED spread is the most important indicator to watch, because until the banks can honestly claim some hope of solvency and are able and willing to resume something approximating normal functioning, any other market activity is epiphenomenal at best.  While the VIX deserves its popular title as the “fear index,” in this climate even it may be too broad a tool.  The perception banks have of each other is a more important factor right now, and the moderation of that perception remains a necessary condition for any market recovery, even in the short term.

The part we got right was that nobody should look at equities as the most important barometer when the biggest players in equities – banks, funds, and other institutions – can’t function normally.  When a significant portion of intraday selling is caused by forced liquidations and margin calls, it just doesn’t make sense to count those liquidations as indicative of people’s views about the assets being sold.  In other words, the market is not a mechanism for price discovery when one party to each transaction is participating under duress.

But over the past week, the TED spread has moved considerably off its highs, and while it is still well above its normal range, the VIX is only contuining its steady climb.  Some have posited this as a positive divergence, on the view that improving credit conditions should filter into the rest of the economy and ease concerns.

It now seems that market action is being driven not just by extremely short-term fiscal concerns, but by longer term economic concerns.  That’s the conventional wisdom making headlines, anyway.  It is hard to believe that stocks are being sold today just because participants are waking up to the prospect of a deep recession.  In fact, on a day when the futures trade limit down overnight, it’s probably folly to parse causality at all.  Burton Malkiel was only half right. These days, the financial markets are a finely tuned and delicate watch whose gears are being danced on by the Ministry of Silly Walks.