The Carry Trade with a Twist

Market Summary:  

The major U.S equity averages all posted losses this past week.  Much of the losses in the equity markets were caused by an unwinding of the “carry trade” which in its most basic form involves borrowing money at low interest rates in order to invest in a security or investment that provides higher interest. The policy of the U.S. Federal Reserve has been to keep short term rates near zero until at least 2013. This encouraged investors to borrow short term in U.S. Dollars and buy nearly any other asset with that money, especially gold, other commodities and emerging market debt and equities. These carry trades typically involve leverage, and when circumstances turn against investors employing this tactic the result is usually a rapid decline in the prices of assets they were buying (in this case gold, etc.). Margin calls force selling in liquid assets like stocks. The circumstance that changed this week is the Federal Reserve’s “Operation Twist” in which it will sell short term Treasuries (which will push up short term rates) and buy long term Treasuries (lowering long term rates). This makes the carry trade less profitable and caused a rush for the exits. Unfortunately, the situation will have to work itself out which, in combination with ongoing concerns about global growth and European financial conditions, could cause more volatility in the near term.

The S&P 500® closed down -6.5% for the week.  The top-performing sectors in the S&P 500® Index included Utilities (-1.7%) and Telecommunications (-3.7%), while bottom-performing sectors included Energy (-11.6%) and Basic Materials (-12.2%).  In the fixed-income market, the 10-year Treasury gained ground with the yield ending the week at 1.84%.

We continue to seek those companies possessing identifiable catalysts, and focusing on those stocks with favorable odds.

A Premier Industrial Company 

Danaher Corp. (DHR), headquartered inWashington,D.C., is a designer, manufacturer and marketer of medical, industrial, professional and consumer products. DHR was founded in 1969 and was previously known as DMG, Inc., but later took the Danaher name in 1984. The company produces a broad range of products including electronic calibration equipment, retail/commercial petroleum products such as underground storage tank leak detection systems, high-precision optical systems for the analysis of microstructures and aerospace defense articles, among others. DHR’s primary product lines are sold in North America, Europe andAsia.

DHR has a long history of delivering consistent earnings growth through continual development of its own businesses and by acquiring businesses that are fast growing and have high returns.  Over the years, the company’s management team has demonstrated skill and discipline in selecting and integrating its many purchases.  A more recent purchase included an expansion in the biomedical testing and research industry.  In the long-term, we expect DHR to outperform its peers and the market.