Long story short, SquashFS with LZO compression is the officially supported method to pack repositories. InstallCD should support it to decrease my irritation :).
04:10 < irker905> proj/releng: jmbsvicetto releases/weekly/specs/amd64/hardened/ releases/weekly/specs/amd64/ releases/weekly/kconfig/amd64/: releases/weekly/specs/amd64/installcd-stage2-minimal.spec Enabled for amd64. I'm working on an x86 chroot to update the kernel configuration for x86 (install-cd and admin-cd).
I looked at the latest kernel config for the install-cd and admin-cd, for both amd64 and x86 and the option is enabled, so I'm going to close this bug as I believe it has been fixed a long time ago.