Condor Options

People have ideological reasons for opposing the nationalization of U.S. banks, in whole or in part, and that’s understandable.  But at this moment, the only viable ideological positions seem to be Keynesian or anarchist.  Paul Kedrosky summarizes the situation well:

People keep talking about the perils of nationalizing the banking system. Newsflash: There currently is no banking system, if by that you mean a network of organizations lending to one another and to quality companies in a predictable way. (Look at the spread on today’s IBM issue for an example.) Instead, there are a bunch of paralyzed deposit-hoarding institutions stuck in a game theory experiment that no-one understands or can exit.

The solution to a systemic breakdown in tightly-coupled systems is to uncouple the systems, build in slack, and break the feedback mechanisms — and not necessarily in that order. In this context you can do that most directly by either recapitalizing a select set of banks immediately, or by letting banks fail and consolidate. Either way, you end up with uncoupling and the eventually reappearance of trust, whether through a government backstop or through defaults and collapse. I tend toward the former approach, but I fully understand its risks and the attractiveness of the latter to some people. [link]

Until we have a functioning banking system again, there is no reason to expect any positive developments in equity markets.  The best signal of a relaxing credit system will be a falling TED spread:

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.