Tuesday, December 08, 2015

Screw Tightens for Alternative Energy Producers

Next week the Federal Open Market Committee (FOMC) of the Federal Reserve is expected to approve an increase in the country’s benchmark interest rate.  It will be an event of some importance for everyone.  Indeed, the current crop of corporate and financial professionals have been called Generation Zero, since many have never experienced an interest rate increase or interest rates above zero. 

The last time the ‘Fed Fund’ rate was increased it was June 2006.  In that month he U.S. House of Representatives rejected the concept of Internet neutrality.  Dwyane Wade was named Most Valuable Player and the Miami Heat trounced the Dallas Mavericks to win the National Basketball Association championship.  The next month in July 2006, U.S. housing sales and prices peaked near $230,200.  In the year 2006, home foreclosures increased 42% over 2005, signaling the beginning of a tumultuous economic period.

The Federal Funds rate has been near has been near zero for seven years.  In December 2008, the FOMC lowered the rate to a quarter percentage point following one of the gloomiest jobs reports in U.S. history.  Earlier that month the government had announced the loss of over a half million jobs as the country headed into the worst recession since the 1930s.  Since the Federal Reserve’s mandate is to work for maximum employment, the report pushed the Federal Reserve’s collective back up against the wall.    

It has been a long, slow slog to restore those lost jobs.  The Federal Reserve has found necessary to keep interest rates at an unprecedented low level to fuel economic recovery.   The most recent jobs report issued on December 4th of this month has finally given the FOMC the justification it needed to finally take its foot off the accelerator. 

It will be a momentous decision for shareholders in companies with leverage.  Companies in nearly all sectors have become accustomed to very cheap debt capital.  We expect some companies to feel the pinch of higher interest rates.  With this point we begin a short series of articles on alternative energy companies that might be at risk should the Federal Reserve go forward with an increase in the benchmark interest rate.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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