Summary

The banking crisis may be passing, but I see three risks remaining in the financial system.

These are collapsing issuance in the leveraged loan market, falling commercial real estate prices, and ESG greenwashing.

Introduction

The latest banking crisis in the US and Europe shows that the financial system still faces several risks, both old and new. Here are three that we are worried about.

The Leveraged Loan Market

This relates to private equity as they are big users of leveraged loans to finance buyouts. Essentially, leveraged loans are loans given to companies with low credit quality. In 2013, US issuance crossed $1 trillion for the first time. Between 2016 and 2022, it averaged $1.2 trillion per year (Chart 1). Issuance has collapsed this year.

How many of these previously issued loans will default? Certainly, the rise in yields and, hence, leverage loan rates, will make it harder for them to be refinanced (Chart 2). Moreover, banks may be scaling back their willingness to issue new loans. And if we get a recession, then defaults will likely surge.

How would this transmit through the system? Bank of America, JP Morgan, and Wells Fargo would likely have some exposure, given they are the biggest book-runners in this market. But typically, the bulk of leveraged loans get packaged up into collateralised loan obligations (CLOs). These are then bought by asset managers and asset holders, such as pension funds and insurance companies. They would suffer losses and may end up selling their holdings.

Commercial Real Estate (CRE)

Anytime yields are low, real estate does well. The monetary and fiscal stimulus after the COVID-19 pandemic saw commercial real estate prices surge. Between March 2021 and March 2022, US industrial unit prices jumped 25%, apartment block prices jumped 23%, retail units jumped 20% and even office blocks rose 13% (Chart 3). The trouble is that price gains are moderating and, in some cases, turning into annual declines (apartment blocks and offices). This could prove problematic for banks with exposure to these sectors.

Screening US banks, we find smaller banks have a larger share of their loan book exposed to CRE. Notable banks include New York Community Bancorp (they also just bought some assets of the failed Signature bank), and Valley National (Table 1). Both have loan books of around $40bn with more than half in CRE. Meanwhile, larger banks like JP Morgan, Citi, and Bank of America have exposures less than 15% of their books to CRE. Europe has similar issues, notably the Nordic markets.

Environmental, Social, and Governance (ESG) Funds

This may seem odd, but aside from performance issues, there are regulatory and legal risks around greenwashing. Many funds may have classified themselves as ‘ESG’ but may not meet independent verification. Already, news sources suggest MSCI is in the process of reclassifying companies.

The trouble is that there has been a surge of inflows into ESG funds. Focusing on exchange-traded fund (ETF) markets, we find that since the starting of COVID, almost $500bn of flows have gone into ESG ETFs (Chart 4). Were these flows to reverse, asset managers could suffer losses, which in turn could induce other outflows. Moreover, if ESG ratings were to be found to be ‘manipulated’ this could become the next big financial scandal.

Summary: SpaceX's launch of a new business entirely dedicated to military-oriented applications for their satellites indicates that the broader satellite industry is likely to move toward pursuing contracts with the US Department of Defense (DoD) and other government bodies looking to work more closely with private entities in space. SpaceX has already contracted directly with the Space Force and Pentagon to launch US government satellites, and will now aim to secure even more partnerships by recalibrating the utilization of their commercial Starlink satellites.

Spaceshield's launch follows the origination of billions of dollars' worth of new satellite contracts by the DoD throughout 2022, and a likely expansion in the future. MRP has previously highlighted the potential for low Earth orbit (LEO) satellites to engage in imaging, mapping, reconaissance, and other critical miltary applications. Further opportunities could be generated by the development of private satellites networks in cislunar space as well.

Related ETF & Stocks: SPDR S&P Aerospace & Defense ETF (XAR), Maxar Technologies Inc. (MAXR), BlackSky Technology Inc. (BKSY), Planet Labs PBC (PL), L3Harris Technologies, Inc. (LHX)

Last week, SpaceX announced the launch of its new Starshield line of satellites, a secured satellite network for “government entities” to “support national security efforts.” Though the new enterprise’s tech will be similar to what’s offered by SpaceX’s consumer satellite internet business, Starlink, SpaceX said Starshield will be utilized exclusively by government entities and employ even more secure end-to-end encryption employed by existing company satellites, and have the ability to handle classified cryptographically encrypted data.

Last month, SpaceX included classified satellites, meant for use by the US Space Force and the Pentagon, as part of the payload on their first Falcon Heavy rocket launch in three years. The Falcon Heavy is SpaceX’s largest rocket and, per the Wall Street Journal, was likely utilized due to the significant size of the Penatgon satellites, some of which were the size of a school bus and cost more than $1 billion. Little other information was given about the nature of the satellites.

SpaceX is just the latest satellite business to expand its potential in the realm of defense applications. Though it is not publicly traded, it is a leader in the private satellite business and a new focus on securing military contracts is likely a sign that the entire industry will follow. On April 26, MRP first highlighted the key role satellite imagery is playing in the US’s monitoring of Russia’s attack on Ukraine and its implications for the world. Government agencies and media sources alike have been bombarding satellite companies for photographs, 3D mapping, and other data, prompting the firms to expedite the expansion of their constellations. This was referred to as geospatial intelligence’s “internet moment” by Bill Rozier, the vice president of marketing at publicly traded satellite imagery provider BlackSky.

Just about a month later, on May 25, the US National Reconnaissance Office (NRO) announced they’d be funding three firms with billions of dollars in defense contracts throughout the next decade as part of its Electro-Optical Commercial Layer (EOCL) program. Each of those chosen firms, Maxar Technologies Inc., BlackSky Technology Inc., and Planet Labs, were direct focuses of our April intelligence briefing on this budding industry.

Maxar, in a securities filing, said its 10-year EOCL contract is worth up to $3.24 billion, with a five-year base contract of $1.5 billion and optional contracts worth up to $1.74 billion. BlackSky’s contract is valued at up to $1.02 billion over 10 years. Planet’s award is worth $146 million over five years, but the company has declined to disclose the full value of the contract over the next decade.

Back in August, L3Harris acquired satellite specialist Viasat Inc’s military communication unit for about $1.96 billion to better align with U.S. defense spending priorities. That massive purchase followed L3Harris’s partnering up with Maxar Technologies to win a new contract from the US Space Development Agency (SDA) for the design and production of 14 spacecraft platforms and associated support for its Tranche 1 Tracking Layer project. The tracking layer, set for delivery by 2024, will provide limited global indications, warning and tracking of conventional and advanced missile threats, including hypersonic missile systems. Generating a defense against hypersonic missiles has become particularly critical for the US, given Russia’s demonstrated capability to deploy them in a battlefield setting. MRP has repeatedly highlighted an increasing focus on commercial satellites’ ability to support critical military reconnaissance efforts.

Certainly, there will be no shortage in demand for satellites going forward, given the US military’s ongoing efforts to expand the Space Force. Per Breaking Defense, the latest “compromise” version of the fiscal 2023 National Defense Authorization Act (NDAA) plans to pump up Space Force spending across the board — with one of the biggest boosts for classified research and development programs, where lawmakers added $333 million to the service’s already whopping $4.973 billion request, for a total of $5.306 billion. Overall, the Space Force has requested a budget of $24.5 billion in fiscal 2023, up from $17.4 billion last year. SpaceNews notes that the bill directs DoD to figure out a strategy to protect military satellites from threats in orbit and encourages it to continue working with commercial launch providers on new concepts of operations.

Further, the US’s Defense Innovation Unit (DIU) has recently been seeking proposals for commercial services to deploy and operate payloads in outer space beyond Earth orbit, an area known as cislunar space. That territory far beyond the most popular services satellite firms have been providing with low Earth orbit (LEO) modules, presenting a new opportunity in a largely unexplored realm for privately-held contractors. The DIU wants technologies that can be prototyped within 12 to 18 months from contract award.

THEME ALERT

As Research and Markets reports, the global satellite data service market is estimated to be worth $13.7 billion in 2022. It is expected to reach $35.9 billion by 2027, growing at a CAGR of 21.2%.

In the same way that US spending on missiles, aircraft, and other technologies will be critical in modern warfare, the militarization of space will also require significant funding. A major focus of the Department of Defense’s policy in space will be satellite data and imagery, as evidenced by the significant demand for those products throughout this year. While the war in Ukraine may only be a temporary state of affairs, monitoring Russian aggression, as well as China’s moves in the Pacific and other areas, will remain a critical component of the US and its allies’ defensive capabilities.

Summary: For the first time since 2019, the airline industry may return to profitability next year. With the holiday season set to officially kick off in the US this week, passenger numbers, cancellations, and other data should help investors get a better handle on what to expect through the end of 2022 and into the first half of 2023. 

Airport traffic has begun to approach pre-pandemic levels on a consistent basis while the number of employees at airlines has already begun surpassing 2019 levels. An inustry hiring spree throughout the Summer and Fall has been a critical step in stemming a surge of cancellations. Some additional relief for carriers' bottom lines should be granted by a significant easing of jet fuel prices.

Related ETFs: Defiance Hotel, Airline, and Cruise ETF (CRUZ), U.S. Global Jets ETF (JETS)

Per Bloomberg, the director general of the International Air Transport Association (IATA), Willie Walsh, announced this week that the airline industry remains likely to achieve positive earnings next year for the first time since 2019. The IATA, which is a trade association representing some 290 airlines or 83% of total air traffic, originally predicted this rebound in June and, despite economic headwinds that have prompted pessimism about consumer spending in the year ahead, they’re sticking to their forecast.

US airline and traveler data for the period of this Wednesday to Sunday should generate a pretty good preview of what we can expect for the upcoming Spring and Summer travel season. AAA estimates that approximately 54.6 million people are expected to travel at least 50 miles from home this Thanksgiving, equivalent to about 98% of pre-pandemic volume.

As of their latest estimates, the Transportation Security Administration (TSA) expects travel volumes this week could approach pre-pandemic levels, with 2.5 million passengers or more passing through US airports on the busiest days. By comparison, The Wall Street Journal notes that the number of daily passengers traveling by plane peaked on the Sunday following Thanksgiving 2019, touching a record high of 2.9 million.  

There have been numerous days throughout the past several months where TSA checkpoint travel data has reached or exceeded 2019’s airport traffic – including this past Sunday-Monday period – but that trend has yet to gain consistent traction.

Though passenger numbers are just catching up to pre-pandemic levels, airlines have already passed 2019 staffing levels, according to Airlines for America (A4A). Associate member airlines under A4A include major carriers from Southwest Airlines to American Airlines. Relentless staff shortages were a serious detriment to airlines throughout 2022, causing an inordinate number of flight cancellations. According to Department of Transportation (DoT) data, cited by USA Today, more than 45,000 flights, representing almost 2.5% of all scheduled services, were canceled between June 1 and August 31. And over 413,000 flights (22.5%) were delayed by 15 minutes or more in that same period.

To address this, CNN notes that United Airlines has said it's on track to hire 15,000 employees in 2022, and Delta Air Lines CEO Ed Bastian told CNN the company has hired 25,000 people since the start of last year and is still hiring. Pilot shortages were a particularly difficult that airlines faced, but The Points Guy reports there are now 10% more pilots working for A4A carriers than prior to the pandemic.

Another factor working in airlines’ favor has been, despite ticket prices rising almost continuously, energy costs finally beginning to ease significantly from their highs earlier in the year. Recent IATA data shows that, although fuel remains significantly more expensive than it was a year ago, their jet fuel price index declined to 358.5 on November 18, down from more than 480.0 in June – a decline of 25.3%.

Summary: Growth in electric vehicle sales has remained relatively stable when compared to broader automotive markets in the US and abroad. The largest and most robust EV market is still China's and several of the country's top EV brands are now attempting to expand internationally.

After developing a foothold in Norway, numerous Chinese vehicle brands could end up selling their cars throughout the European continent in the years ahead. Some forecasts see Chinese automakers eating up almost 8% of Europe's EV market. These brands have also begun to see success in Southeast Asia, where their affordable pricing is particularly attractive.

Related ETF & Stocks: First Trust S-Network Future Vehicles & Technology ETF (CARZ), Tesla, Inc. (TSLA), BYD Company Limited (BYDDY), NIO Inc. (NIO)

Per the New York Times, battery-powered cars now make up the fastest-growing segment of the auto market, with sales jumping 70% in the first nine months of the year from the same period in 2021. That's according to data from Cox Automotive which found sales of conventional cars and trucks fell 15% in the same period. Additionally, electric vehicles’ share of new vehicle sales almost doubled YoY in the first nine months of 2022, jumping to 5.6%.

Similar data from Experian Automotive indicted that registrations for electric vehicles rose 57% compared to the same period last year. UtilityDive reports that more than 530,000 new battery-electric vehicles were registered in the US through September.

Despite those positive developments in America, China is still the dominant market for EVs. In fact, Bloomberg reports that China’s share of global passenger EV sales has gone from 26% in 2015, to 48% in 2021, to 56% in first half of 2022. By the end of the year, that share of the global market could be more than 60%.

Within China, EVs are expected to account for 20% of overall vehicle sales this year, up from 13.6% in 2021, the industry association said. China's electric-car market stayed red-hot in the first nine months of 2022. China EV sales soared 83% in September, while overall car sales grew just 3%, a two-decade low, according to China Passenger Car Association data, cited by Investor’s Business Daily.

Though US automaker Tesla remains the global leader in EV sales, China’s BYD saw combined Chinese sales of its pure electric and hybrid plug-in vehicles increase 250% in the first nine months of the year to 1.2 million units, outpacing a 110% rise for the overall EV segment. By comparison, Reuters notes that Tesla sold just over 318,000 electric vehicles in China during the first nine months of the year.

The strength of the Chinese market could help launch some of the country’s electric vehicle brands abroad. According to China Daily, China's vehicle exports hit a monthly record in October, with 337,000 units shipped overseas. Around one-third were new energy vehicles (NEVs), up 81% YoY.

Last year, BYD and Nio began selling their vehicles in Norway – one of the fastest growing EV markets in the world. In the first half of 2022, EVs’ share of all new vehicle sales in Norway was 79%, up 21 percentage points from the same period last year. From January to July, CnevPost reports that 5,726 Chinese branded EVs were registered in the country, up 204% YoY. 54,000 electric vehicles were sold in the Norway through the first half of the year.

As a whole, Reuters notes that electric and hybrid vehicles accounted for 43% of sales of new cars in the European Union in the third quarter, data from the European Automobile Manufacturers Association (ACEA) showed on Thursday. In addition to BYD and Nio, companies such as SAIC, Geely and Great Wall Motors, or startups such as Xpeng, could soon enter Europe as well. Per Deutsche Welle, experts expect around 20 Chinese brands could soon be rolling in Europe. PwC forecasts that Chinese brands will have an EV market share of 3.8% to 7.9% in Europe.

Chinese automakers could increasingly expand their presence in Southeast Asia soon as well. The affordable prices of Chinese-made EVs are particularly appealing to the emerging economies in this region, typically selling between 100,000 yuan and 200,000 yuan ($14,100 - $28,200). In Thailand, for example, TTB Analytics has forecast that EV sales could jump 539% YoY to 63,600 units this year. South China Morning Post notes Great Wall Motors sold 8,094 EVs between January and September this year in Thailand, becoming the country’s biggest EV player in terms of sales volume.

Summary: Though gold has skidded into its worst losing streak in more than 150 years, central bank buying has accelerated to multi-decade highs. That's likely due to deteriorating geopolitical and economic conditions, which threaten to derail the ongoing spate of monetary tightening that has suppressed gold prices throughout most of the year.

Many central banks gold buyers are the usual suspects, but “unreported purchases” are also playing a major role in demand. China and Russia typically fall under this category but representatives of Russia's central bank recently claimed they have halted purchases of Gold. China is likely still accumulating, however, with imports of the metal reaching a four year high in August.

Related ETF: SPDR Gold Shares (GLD) and iShares Silver Trust (SLV), VanEck Gold Miners ETF (GDX), Global X Silver Miners ETF (SIL)

As the Wall Street Journal notes, Gold fell for its seventh straight month in October. Per Deutsche Bank, that is the metal’s worst losing streak since 1869. That has not stopped some of the largest financial institutions in the world from accruing more, however, as central banks bought a record 399 tonnes of gold worth around $20 billion in the third quarter of 2022 alone. That’s according to the World Gold Council (WGC), who notes that haul far exceeds the previous quarterly record in data stretching back to 2000 and took total central bank purchases for the year to 673 tonnes through September; more than the total purchases in any full year since 1967.

The recent jump in central bank buying is only an amplification of an already existing trend that goes back to last year. Central banks added 463 tons to reserves in 2021 as well, an increase of more than 80% from the year prior, per WGC data.

Though a significant portion of gold’s price trajectory has been (and will be) determined by the path of monetary policy going forward, policymaking institutions are likely buying up gold to hedge against geopolitical and economic uncertainty that continues to loom large over the entire world.

Russia and Ukraine has already devolved into a devastating war that appears to have no limit on potential escalation while China gradually lurches further and further into Taiwanese airspace. Just yesterday, North Korea fired off the largest number of short-range missiles they’ve ever launched in a single day into the waters off the east and west coasts of the Korean Peninsula.

On the economic front, recession appears more and more likely for major economies across globe heading into 2023, threatening to disrupt the monetary tightening taking place in the US – undoubtedly the top variable that has suppressed gold prices throughout the year. If the size and volume of rate hikes potentially closing in on a peak, that would also signal a possible turning point for gold as well.

Though several of the top institutional gold buyers were no surprise, including Turkey, India, and Qatar, Bloomberg reports that what WGC refers to as “unreported purchases” amounted to a “substantial” estimate. Many central banks either do not report purchases or may do so with a lag, the WGC noted. A couple of the countries who usually abstain from reporting their gold buys are notorious gold hoarders Russia and China.

Each of those countries not only buy gold in the open market, but have a significant flow of domestically-mined gold within their respective nations.

For instance, Chinese miners produced 269.987 tons of gold in the first nine months of this year, an increase of 33.235 tons or 14.0% from the same period last year, industry data cited by China Daily showed. At the same time, gold shipments into China are surging as imports hit a four-year high in August. Despite a wave of outflows from gold ETFs, which jumped to a 19-month high September, Chinese gold ETFs defied the trend and witnessed their fourth consecutive monthly inflow.

Back in June, we noted that the CBR resumed purchases in their domestic market, following a two year hiatus, at a fixed price of ₽5,000 per gram (₽141,748 or $2,268 per oz at the time) between March and June of this year. Following the Ruble’s rapid appreciation, touching a seven year high versus the US Dollar (USD) in late June, Russia said they would renegotiate that price. Per Bloomberg, the CBR spent six years continually accumulating a significant gold horde, doubling its holdings and becoming the biggest sovereign buyer throughout the latter part of the 2010s. The CBR held about 2301 tons of gold at the end of 2021, representing the fifth-highest level of reserves worldwide.

More recently, however, Russia's central bank deputy governor Aleksey Zabotkin recently stated that it would be inadvisable to continue accumulating gold at this point, citing a potential increasing of the nation's money supply amid high rates of inflation within the country. While the central bank itself may be backing off from a gold-buying policy, gold and precious metals are still flying off the shelves in Russia. Kitco reports that the federation’s largest lender, Sberbank, has sold 100 tonnes of precious metals (89 tonnes of that being silver), as the bank’s customers opened 300,000 new unallocated metal accounts between January and September, Interfax reported. Though most of the new purchases were silver, Kitco notes Russians still spent around $550 million on gold at Sberbank.

Investors can gain exposure to gold and silver via the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV), as well as precious metal miners via the VanEck Gold Miners ETF (GDX) and Global X Silver Miners ETF (SIL).

Summary: Q3 earnings figures in the US aerospace and defense industry were broadly positive, pushing up valuations across the sector throughout the back half of October. Ongoing material support for Ukraine in its fight against Russia has created a dual need for America to provide direct assistance, drawn down from their existing weapons stockpiles, as well as submit orders to defense contractors for brand new equipment. Those orders will either be sent over to Ukraine once delivered, or utilized to re-fill America's ever-thinning military inventories.

Additionally, increasing needs for satellite reconnaissance and modern tanks may need to be met as the war in Ukraine continues to develop, opening up even more opportunities for contractors who have a significant presence in those markets. It appears unlikely that a renewed surge in defense spending will abate anytime soon.

Related ETF & Stocks: SPDR S&P Aerospace & Defense ETF (XAR), Lockheed Martin Corporation (LMT), Raytheon Technologies Corporation (RTX), General Dynamics Corporation (GD), L3Harris Technologies, Inc. (LHX)

A spate of earnings reports from key defense contractors have sent shares of firms throughout the aerospace and defense industry soaring. Since the start of October, the SPDR S&P Aerospace & Defense ETF (XAR) has gained 13%, more than doubling the S&P 500’s gain of 6% throughout the same period. Q3 2022 could represent an inflection point for beleaguered weapons manufacturers that have been stuck in a downward trajectory for more than a year.

As of August, regular US support packages for Ukraine began including not only shipments of equipment and ammunition from existing American stockpiles, but also brand-new orders from defense firms. As MRP previously noted, the US’s assistance to Ukraine has put a significant strain on its own weapons inventories. As an example, about 7,000 Javelin missiles, equivalent to one-third of the US’s stockpile, had been sent to Ukraine through June, according to an analysis by Mark Cancian, a senior adviser with the Center for Strategic and International Studies international security program, cited by Military.com. Another 2,000 Javelins had been guaranteed to Ukraine through the month of August.

More recently, Cancian has told Nikkei Asian Review that "Some U.S. inventories are reaching the minimum levels needed for war plans and training.” Along with providing new weapons to Ukraine, manufacturing capacity will also be needed to re-fill thinning US stocks of equipment, vehicles, and weaponry.

Lockheed Martin Corp. led the way for the defense industry a couple of weeks back, charting a return to sales growth in 2024 after ironing out persistent supply-chain challenges and pulling in a wave of new contracts. The company reported adjusted earnings per share (EPS) of $6.87 from $16.6 billion in sales. That beat Wall Street projections for $6.72 per share, but sales fell slightly short of a $16.7 billion sales estimate. Still, the stock soared on free cash flow growth of 68.8%, rising to $2.7 billion in Q3 YoY, as well as a 7.0% rise in the quarterly dividend rate.

The Wall Street Journal notes that the company added $5 billion to its backlog of orders during the September quarter, raising the total to $140 billion. While the company said only a fraction of this relates to Ukraine, CEO Jim Taiclet said Lockheed is considering the expansion of plants used to produce Javelin missiles and High Mobility Artillery Rocket Systems (HIMARS), two forms of equipment that play a critical role in US and Ukrainian military strategy. MRP previously published a deep dive on the potential impact of HIMARS on the conflict in Ukraine, using them as a base to analyze broader trends in military aid and how they can impact the momentum of the war.

Lockheed has disclosed plans to ramp up HIMARS production from 60 to 96 units per year. As of mid-October, the United States had committed 38 HIMARS to Ukraine since Russia’s invaded the country in February, the DoD said in a factsheet cited by Breaking Defense. Of that total, 20 HIMARS have been provided to Ukraine through the presidential drawdown authority, which sources them from the US military’s existing stockpile. The department is contracting 18 new HIMARS from Lockheed for direct deployment to Ukraine as part of a $1 billion arms package funded by the Ukraine Security Assistance Initiative.

Raytheon works in conjunction with Lockheed to produce Javelin missiles and notes on its website that both companies will be increasing their missile production rate. For Lockheed, that means a near doubling from the current production pace of 2,100 per year to almost 4,000 per year. Though javelin missiles were not mentioned on Raytheon’s earnings call, the company did report a near 5% quarterly rise in third-quarter revenue to $16.95 billion, as well as EPS of $1.21. Like Lockheed, Raytheon fell short of Wall Street’s estimates on revenue ($17.23 billion) while beating on earnings ($1.14 per share), but in contrast to its Javelin partner, Raytheon’s stock fell sharply after earnings due to a YoY decline in both aforementioned metrics.

One big silver lining in Raytheon’s report, however, was that the company did deliver two National Advanced Surface-to-Air Missiles Systems (NASAMS) to Ukraine, part of eight NASAMS systems and an unspecified amount of ammunition the Pentagon has promised to Kiev. That number will likely rise in coming months, following a particularly aggressive Russian air offensive throughout Ukraine targeting critical electrical infrastructure including power plants. Attacks are still ongoing as Reuters reports the recent missile and drone assaults have eliminated at least 30% of the country’s generating capacity.

General Dynamics (GD) announced earnings per share of $3.26 on revenue of $10.00 billion, beating analyst expectations for EPS and revenue. General Dynamics is the manufacturer of the US’s M1 Abrams tank, among the most critical pieces of weaponry in America’s armored arsenal. Though none of these have been promised to Ukraine yet, there is a rising possibility that they will be in the near future. Ukrainian defense minister Oleksii Reznikov has repeatedly called for the US to begin providing these tanks, but the US has rebuffed such requests due to the significant fuel needs of the Abrams and a completely different operational system than the soviet-style tanks Ukrainian troops are accustomed to. If the US’s attitude changes on this issue, it would be a radical shift in US policy toward the war in Ukraine and likely bolster future revenues at GD.

One final firm we will highlight is L3Harris, which earned $3.26 per share on sales of $4.25 billion in Q3, missing consensus estimates from Zacks. Despite the misses, one standout piece of L3Harris’s earnings was its space business, particularly satellite systems – which the company continues to invest in aggressively. Back in August, L3Harris acquired satellite specialist Viasat Inc's military communication unit for about $1.96 billion to better align with U.S. defense spending priorities.

That followed L3Harris’s partnering up with Maxar Technologies to win a new contract from the US Space Development Agency (SDA) for the design and production of 14 spacecraft platforms and associated support for its Tranche 1 Tracking Layer project. The tracking layer, set for delivery by 2024, will provide limited global indications, warning and tracking of conventional and advanced missile threats, including hypersonic missile systems. Generating a defense against hypersonic missiles has become particularly critical for the US, given Russia’s demonstrated capability to deploy them in a battlefield setting. MRP has repeatedly highlighted an increasing focus on commercial satellites’ ability to support critical military reconnaissance efforts.

Summary: US semiconductor and semiconductor equipment firms, as well as any foreign firms who contract with or purchase equipment from them, will now face more restrictions in their dealings with China's tech sector. Aggressive guidelines, meant to smother Chinese development of domestic chip technologies, have been gradually handed down by the White House, with the most recent spate of rules being the strictest to date.

This is significant, considering China became the top global market for semiconductor sales in 2020 and some US companies rely on the country's firms for hundreds of millions of dollars in quarterly revenue. This crackdown will compound downward pressure on stocks already suffering from tumbling sales of PCs and smartphones.

Related ETF & Stocks: iShares Semiconductor ETF (SOXX), Taiwan Semiconductor Manufacturing Company Limited (TSM), Advanced Micro Devices, Inc. (AMD), NVIDIA Corporation (NVDA)

The US will clamp down even harder on Chinese access to semiconductors made with American equipment, enhancing restrictions communicated in letters from the US Commerce Department to three American companies – KLA, Lam Research and Applied Materials – earlier this year. Per Reuters, the raft of measures could amount to the biggest shift in US policy toward shipping technology to China since the 1990s.

As MRP noted last month, it was uncovered in July that China had quietly advanced their semiconductor fabrication processes to include the production of 7 nanometer (nm) chips. Per The Register, Chinese semiconductor giant Semiconductor Manufacturing International Corporation (SMIC) had been producing the advanced chips since last year. Until then, most analysts thought SMIC was capable of producing only 14nm chips and that it would take them years to make newer generations of semiconductors.

Mass commercialization of the advanced chips has not yet been reached since the country is effectively locked out from acquiring the extreme ultraviolet (EUV) lithography machines typically used to produce them, and the US wants to keep it that way. 7nm technology is just one generation behind 5nm, used for some of the most high-end tech devices.

This damaging blow to China’s tech ambitions will also reverberate through the global chip sector, since China became the world’s largest market for semiconductor manufacturing equipment, with sales worth $18.72 billion. China accounted for about $212 billion of the $582 billion in chips sold globally in 2021, according to IDC. Per TechCrunch, Nvidia has said the regulations on shipping its A100 and H100 chips could cause it to lose as much as $400 million of revenue this quarter. South China Morning Post notes that China accounts for about a quarter of total sales at Nvidia, in gross terms.

US companies must now apply for a license if they want to sell certain advanced computing semiconductors or related manufacturing equipment to China. Washington added more Chinese firms to a list of companies that it regards as “unverified”, which indicates US officials cannot complete on-site visits of company facilities to determine if they can be trusted to receive sensitive technologies. That requires greater oversight and creates more hoops to jump through for US semiconductor manufacturers to sell to these firms.

New rules will also block shipments of a broad array of chips for use in Chinese supercomputing systems and require foreign companies to obtain a license if they use American tools to produce specific high-end chips for sale to China.

While the strategic importance of stymying China’s chip ambitions is critical for the US government, this latest effort could not come at much more difficult time for the semiconductor industry. According to SIA (Semiconductor Industry Association), global semiconductor industry sales were $47.4B during the month of August 2022, barely increasing at a rate of just 0.1% from last year, and down -3.4% compared to July 2022.

Last week, Advanced Micro Devices (AMD) went so far as to announce it would fall short of its (already conservative) financial forecasts for Q3, largely due to a 40% drop in client sales to about $1 billion, compared with Wall Street’s consensus estimate of $2.04 billion.

Per IDC data, third-quarter PC shipments worldwide fell 15.0% YoY to 74.3 million worldwide. As MarketWatch notes, that is just slightly short of the second-quarter decline of 15.3%, which marked the sharpest quarterly drop off in shipments since IDC began collecting data back in the mid-1990s. Compounding the weakness in PCs, IDC sees the smartphone market shrinking by 6.5% this year to 1.27 billion units.

Per Bloomberg, the Philadelphia Stock Exchange Semiconductor Index fell 3.5%, closing at its lowest level since November 2020. The index dropped nearly 10.0% over the past three trading days, and is now down more than 40.0% so far this year.

Shares of Asian semiconductor firms like Samsung and Taiwan Semiconductor Manufacturing Co. (TSMC) were particularly hard-hit, as these firms are particularly exposed to the Chinese tech sector. TSMC, the world’s largest contract chipmaker earned 13% of their total revenue from China in the second quarter. TSMC also handles a lot of manufacturing for Nvidia; in particular, the aforementioned H100. The company’s stock plunged a record 8.3% on Monday.

Semiconductor stocks have been battered this year, as a massive bubble in industry valuations continues to be unwound by declining sales and geopolitical conflict between the US and China. Though the highly-acclaimed CHIPS Act, which includes $52 billion to subsidize domestic semiconductor production and an investment tax credit for chip plants estimated to be worth another $24 billion, had been viewed as a cause for optimism, MRP highlights some key risks that could arise from the new policy as well.

As we noted in our August 10 Intelligence Briefing, CHIPS Act Passed, But Semiconductor Shares Slip Lower on Rising Inventories and CapEx Pullback, the chip shortage is already beginning to resolve itself. Intel CEO Pat Gelsinger ultimately sees the chip shortage ending in 2024, but semiconductors manufactured at the mega-factory that Intel is planning may not end up in consumer devices until 2026. Even before that plant is up and running, the prospect of new capacity in the pipeline will not be lost on Wall Street, who will likely be factoring that future output into their long-term estimates for the chip sector and anticipating its potentially dampening effect on firms’ pricing power. Since the release of that Intelligence Briefing, the iShares Semiconductor ETF (SOXX) has tumbled 23.3%.

The potential for a “bullwhip effect” to turn this chip shortage to glut is undoubtedly growing. That could cause shares of semiconductor manufacturers to continue swinging from boom to bust for some time.

Summary: Seismologists and security officials have indicated that severe leaks in both Nord Stream pipelines were caused by explosions, likely constituting acts of sabotage. It is unclear who is responsible for the blasts at this time, but in any case, it likely signals the latest escalation of tensions in the emerging proxy conflict between Russia and Ukraine's international allies. Moscow has been weaponizing energy markets, exploiting Europe's dependence on Russian oil and gas, since at least the Autumn of 2021, which culminated in a complete shutdown of all flows through the Nord Stream pipeline earlier this month.

Depending on the extent of the damage to the pipelines, the EU is likely in a position where it can no longer change posture on suppoting Ukraine and attempt to re-open gas flows via Nord Stream. This will make the diversification of the EU's energy suppliers more urgent than ever. As European nations look to negotiate prices and contracts with major LNG producers like the US and Gulf States, leverage will lean even more strongly toward suppliers.

Related ETFs: United States Natural Gas Fund, LP (UNG), Invesco DB Oil Fund (DBO)

Both Nord Stream 1 and 2, critical gas pipelines that connect Germany and the rest of Western Europe’s energy infrastructure to Russia, have been damaged in what seismologists have deemed explosions of some sort and not natural phenomena. Per Björn Lund, director of the Swedish National Seismic Network at Uppsala University, speaking to NPR, said it is "very clear from the seismic record that these are blasts… These are not earthquakes; they are not landslides underwater." The second explosion, which likely targeted Nord Stream 1, was reportedly equivalent to at least 100 kilograms of dynamite.

MRP has been warning of the dangers facing energy supplies and infrastructure since October 2021 when Russia first began to weaponize their gas exports by cutting gas flows via the Yamal-Europe pipeline  by upwards of -70%. As it turned out, this was indeed preparation for a coming invasion of Ukraine, which begun in February 2022. Throughout the course of the war, Russia has tried to break European support for Ukraine by whittling down its critical gas flows to the continent, slamming the continent’s economies with an ongoing energy shortage that promises to intensify this winter.

The European Union (EU) has tried to strike back at Moscow by diversifying their supplies away from Russian oil and launching an embargo, set to halt all EU purchases of Russian oil in December (minus oil that flows through the Druzhba pipeline to Hungary, Slovakia, and the Czech Republic). This has had little effect on Russia’s overall export capabilities thus far, since buyers in China, India, and several other markets have been happy to replace European demand and purchase Russian oil at a discount. EU members have more recently pushed for a “price cap” on Russian oil, which may or may not have any actual impact on market prices outside of Europe, but negotiations between EU member states on that issue have been delayed.

Several European leaders, including Prime Ministers from Poland, Sweden, and Denmark, have already come forward to publicly condemn the damage inflicted on the Nord Stream pipelines as a deliberate act. Many others in the international community have undoubtedly made their judgements about the blast at this point, even if they are waiting to issue a formal response.

Both pipelines were offline as Nord Stream 2 was never certified for use and flows through Nord Stream 1 were halted indefinitely by Russia early this month. Still, each pipeline was filled with tons of gas before the explosion, which is now spilling into Baltic Sea and, more critically, the atmosphere. The primary component of natural gas is methane, a potent danger to the environment when not handled properly.

Andrew Baxter, director of energy strategy at the Environmental Defense Fund, told Bloomberg that around 115,000 tons of methane has escaped the pipelines, equivalent to around 9.6 million tons of carbon dioxide. In real terms, that’s the same climate impact as the emissions from 2 million gasoline cars over the course of a year, or two-and-a-half coal-fired power stations. That is potentially the largest methane leak of all time.

The full scale of the damage to the pipelines will be difficult to ascertain until investigators can approach the scene of the leaks, but Reuters reports that it may take a week or two before the areas around the damaged infrastructure are calm enough to be fully investigated. However, if we assume salt water has breached the pipeline, the inner part of the pipe could be threatened by corrosion if action is not taken to empty it soon.

The primary order of business is now to figure out who is behind this sabotage and, moreover, how Europe can respond to the likelihood that any resumption of Russian gas flows via Nord Stream appears to be completely off of the table for the foreseeable future. To answer the first question, it seems obvious who each party on either side of the pipeline will most likely blame for the sabotage, regardless of whatever evidence is uncovered in the near term. The second question is much harder to unravel.

MRP highlighted earlier this month that the closure of Nord Stream has the potential to lead to a shortfall of up to 20% in EU gas needs this year, according to RBC estimates, cited by Reuters. For countries like Germany, who have continued to rely heavily on Russia for a significant portion of their gas supplies, life without Nord Stream promises to be uncomfortable. Klaus Mueller, president of Germany’s Federal Network Agency, warned last month that even with gas storage capacity 95% full, there would only be enough for 2.5 months of demand if Russia switched off flows.

Efforts to replace Russian gas in Europe have had mixed results.

Securing gas imports from the US, for instance, has been no issue. As MRP noted in March, the White House has announced that the US will rapidly increase exports of liquefied natural gas (LNG) to Europe. Per Scientific American, that move will ramp up LNG shipments carried by seagoing tankers by 15 bcm this year. That would be a two-thirds increase of gas supplies when compared to a record 22 bcm of LNG the US sent to Europe last year. According to President Joe Biden, the ultimate goal is to increase that annual total to as high as 50 bcm through at least 2030.

Europe has also tried to appeal to oil and gas-rich Gulf States in the middle east to help close the supply gap left by an exodus of Russian supplies, but this has been a contentious task. German Chancellor Olaf Scholz just wrapped up his tour of the Arabian Peninsula, visiting Saudi Arabia, Qatar, and the United Arab Emirates (UAE) and returned home having secured just one single shipment of LNG scheduled for 2023. Per Bloomberg, the Gulf States are playing hard ball in their negotiations with European nations, attempting to leverage the latter’s dire situation to secure long-term contracts at record prices.

The latest disruption to energy supplies via the sabotage of the Nord Stream pipelines, and what is likely yet another escalation in the proxy conflict between Russia and Ukraine’s international allies, throws more uncertainty into the mix of factors driving persistently high energy prices in Europe and beyond. It is worth noting, however, just as the Nord Stream pipelines were under attack, a brand new pipeline in northern Europe was being opened. The new Baltic Pipe, which will ferry natural gas produced in Norway through Denmark and into Poland. Anadolu Agency reports the pipeline has an annual gas transport capacity of 10 bcm and will help ease the drop-off in Russian gas to some extent.

Summary: Seismologists and security officials have indicated that severe leaks in both Nord Stream pipelines were caused by explosions, likely constituting acts of sabotage. It is unclear who is responsible for the blasts at this time, but in any case, it likely signals the latest escalation of tensions in the emerging proxy conflict between Russia and Ukraine's international allies. Moscow has been weaponizing energy markets, exploiting Europe's dependence on Russian oil and gas, since at least the Autumn of 2021, which culminated in a complete shutdown of all flows through the Nord Stream pipeline earlier this month.

Depending on the extent of the damage to the pipelines, the EU is likely in a position where it can no longer change posture on suppoting Ukraine and attempt to re-open gas flows via Nord Stream. This will make the diversification of the EU's energy suppliers more urgent than ever. As European nations look to negotiate prices and contracts with major LNG producers like the US and Gulf States, leverage will lean even more strongly toward suppliers.

Related ETFs: United States Natural Gas Fund, LP (UNG), Invesco DB Oil Fund (DBO)

Both Nord Stream 1 and 2, critical gas pipelines that connect Germany and the rest of Western Europe’s energy infrastructure to Russia, have been damaged in what seismologists have deemed explosions of some sort and not natural phenomena. Per Björn Lund, director of the Swedish National Seismic Network at Uppsala University, speaking to NPR, said it is "very clear from the seismic record that these are blasts… These are not earthquakes; they are not landslides underwater." The second explosion, which likely targeted Nord Stream 1, was reportedly equivalent to at least 100 kilograms of dynamite.

MRP has been warning of the dangers facing energy supplies and infrastructure since October 2021 when Russia first began to weaponize their gas exports by cutting gas flows via the Yamal-Europe pipeline  by upwards of -70%. As it turned out, this was indeed preparation for a coming invasion of Ukraine, which begun in February 2022. Throughout the course of the war, Russia has tried to break European support for Ukraine by whittling down its critical gas flows to the continent, slamming the continent’s economies with an ongoing energy shortage that promises to intensify this winter.

The European Union (EU) has tried to strike back at Moscow by diversifying their supplies away from Russian oil and launching an embargo, set to halt all EU purchases of Russian oil in December (minus oil that flows through the Druzhba pipeline to Hungary, Slovakia, and the Czech Republic). This has had little effect on Russia’s overall export capabilities thus far, since buyers in China, India, and several other markets have been happy to replace European demand and purchase Russian oil at a discount. EU members have more recently pushed for a “price cap” on Russian oil, which may or may not have any actual impact on market prices outside of Europe, but negotiations between EU member states on that issue have been delayed.

Several European leaders, including Prime Ministers from Poland, Sweden, and Denmark, have already come forward to publicly condemn the damage inflicted on the Nord Stream pipelines as a deliberate act. Many others in the international community have undoubtedly made their judgements about the blast at this point, even if they are waiting to issue a formal response.

Both pipelines were offline as Nord Stream 2 was never certified for use and flows through Nord Stream 1 were halted indefinitely by Russia early this month. Still, each pipeline was filled with tons of gas before the explosion, which is now spilling into Baltic Sea and, more critically, the atmosphere. The primary component of natural gas is methane, a potent danger to the environment when not handled properly.

Andrew Baxter, director of energy strategy at the Environmental Defense Fund, told Bloomberg that around 115,000 tons of methane has escaped the pipelines, equivalent to around 9.6 million tons of carbon dioxide. In real terms, that’s the same climate impact as the emissions from 2 million gasoline cars over the course of a year, or two-and-a-half coal-fired power stations. That is potentially the largest methane leak of all time.

The full scale of the damage to the pipelines will be difficult to ascertain until investigators can approach the scene of the leaks, but Reuters reports that it may take a week or two before the areas around the damaged infrastructure are calm enough to be fully investigated. However, if we assume salt water has breached the pipeline, the inner part of the pipe could be threatened by corrosion if action is not taken to empty it soon.

The primary order of business is now to figure out who is behind this sabotage and, moreover, how Europe can respond to the likelihood that any resumption of Russian gas flows via Nord Stream appears to be completely off of the table for the foreseeable future. To answer the first question, it seems obvious who each party on either side of the pipeline will most likely blame for the sabotage, regardless of whatever evidence is uncovered in the near term. The second question is much harder to unravel.

MRP highlighted earlier this month that the closure of Nord Stream has the potential to lead to a shortfall of up to 20% in EU gas needs this year, according to RBC estimates, cited by Reuters. For countries like Germany, who have continued to rely heavily on Russia for a significant portion of their gas supplies, life without Nord Stream promises to be uncomfortable. Klaus Mueller, president of Germany’s Federal Network Agency, warned last month that even with gas storage capacity 95% full, there would only be enough for 2.5 months of demand if Russia switched off flows.

Efforts to replace Russian gas in Europe have had mixed results.

Securing gas imports from the US, for instance, has been no issue. As MRP noted in March, the White House has announced that the US will rapidly increase exports of liquefied natural gas (LNG) to Europe. Per Scientific American, that move will ramp up LNG shipments carried by seagoing tankers by 15 bcm this year. That would be a two-thirds increase of gas supplies when compared to a record 22 bcm of LNG the US sent to Europe last year. According to President Joe Biden, the ultimate goal is to increase that annual total to as high as 50 bcm through at least 2030.

Europe has also tried to appeal to oil and gas-rich Gulf States in the middle east to help close the supply gap left by an exodus of Russian supplies, but this has been a contentious task. German Chancellor Olaf Scholz just wrapped up his tour of the Arabian Peninsula, visiting Saudi Arabia, Qatar, and the United Arab Emirates (UAE) and returned home having secured just one single shipment of LNG scheduled for 2023. Per Bloomberg, the Gulf States are playing hard ball in their negotiations with European nations, attempting to leverage the latter’s dire situation to secure long-term contracts at record prices.

The latest disruption to energy supplies via the sabotage of the Nord Stream pipelines, and what is likely yet another escalation in the proxy conflict between Russia and Ukraine’s international allies, throws more uncertainty into the mix of factors driving persistently high energy prices in Europe and beyond. It is worth noting, however, just as the Nord Stream pipelines were under attack, a brand new pipeline in northern Europe was being opened. The new Baltic Pipe, which will ferry natural gas produced in Norway through Denmark and into Poland. Anadolu Agency reports the pipeline has an annual gas transport capacity of 10 bcm and will help ease the drop-off in Russian gas to some extent.

Summary: Unsurprisingly, bank profits headed lower in Q2 of this year, largely due to banks preparing provisions for future losses. Deposits and investment banking revenues have also weakened across the financial sector. Lending, however, appears to be quite healthy with demand for credit holding strong and delinquencies remaining extremely low.

That doesn't tell the entire story, however, as rising rates and borrowing costs threaten to weather consumers' ability to service their debt. Moreover, credit score inflation leftover from pandemic relief efforts in 2020-2021 may have temporarily inhibited banks' ability to efficiently budget the risk of their loan books. A persistently flat yield curve could also present issues for the profitability of lending going forward.

Related ETFs: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE)

Per FDIC data, cited by Reuters, US banks reported $64.4 billion in profits in the second quarter of 2022, down 8.5% from a year ago, driven primarily by larger banks boosting their provision expenses for potential losses. Additionally, PYMNTS reports deposits at US banks were down $370 billion in the second quarter. That’s not a significant loss, considering total deposits are still worth more than $19.5 trillion, but it was the first time that deposits declined since 2018.

Additionally, investment banking revenues are on the decline. Per MarketWatch, Dealogic reports that the top 10 investment banks on Wall Street booked $56.4 billion in revenue in 2022 as of September 14, down nearly 39% from $92 billion in 2021 as of the same date, and about 8% lower than 2020’s tally of $61.3 billion.

These factors suggest banks may have to rely more heavily on their lending and credit businesses, which have remained particularly healthy in the face of rising rates across the economy. To keep up, JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co are each raising their prime lending rates to the highest levels since the global financial crisis of 2008, following the latest rate hike from the US Federal Reserve.

Though rates have moved higher and increased the costs of borrowing, they are yet to meaningfully impact borrowers’ credibility as delinquencies remain low across most classes of loans. The FDIC reports that the rate of noncurrent loans – loans that are 90 days or more past due – has fallen to 0.75%, the lowest level seen since 2006. Additionally, DS News notes mortgage delinquencies and foreclosure rates remain near two-decade lows, falling from 2.9% in June from 4.4% in the same month last year.

However, one could argue that cracks are beginning to show in a few places – particularly for loans originated more recently. For example, the Consumer Financial Protection Bureau (CFPB) recently noted that auto loans for consumers with deep subprime credit scores were 2.4% delinquent two quarters after origination, which is a 33% increase from the previous five-year high set in 2020. When looking at delinquency in the first two years after purchase, loans originated in 2021 and 2022 are starting to show higher delinquency rates relative to loans originated in previous years.

Barron’s reported in July that auto repossessions are up 11% among subprime borrowers since 2020 and have doubled from 2% to 4% among prime borrowers, or those with good credit scores.

While subprime borrowers appear to be less reliable recently, those with credit scores in that range are becoming quite rare. As Wolf Street writes, the share of auto loan borrowers with “deep subprime” credit ratings (credit scores of 300-500 on Experian’s credit score scale) plunged from 4.3% in 2017 to a share of only 1.9%, according to Experian’s State of the Automotive Finance Market report for Q2 2022.

In the same way that measures taken by the federal government during the worst of the COVID-19 pandemic have left us with a wave of wave of price inflation, credit score inflation may be yet another lingering aftershock. Due to forbearance on student loans and mortgages, as well as multiple stimulus checks and generous unemployment insurance, those who may have previously fallen behind on debts had a prime opportunity to get caught up with extra cash in hand. However, this could mean the mechanism for accurately judging credit scores and risk may have fallen off balance. That’s not great news for banks and other lenders whose loan books depend on dispensing credit and risk in the most efficient and profitable manner.

Currently, the national average credit score sits at an all-time high of 716, unchanged from a year ago, according to a new report from FICO, cited by CNBC. While average credit scores are not yet slipping lower, 2022 marks the first time since the Great Recession that scores did not improve YoY, according to Ethan Dornhelm, FICO’s vice president of scores and predictive analytics.

Certainly, there is no shortage of Americans who are tapping into new credit lately. Owned and securitized revolving consumer credit has soared to new highs, growing at an annual pace of 14.3% YoY through July, the strongest rate of growth since the end of 1996. Revolving credit includes credit cards and any other debt paid off without a fixed schedule. 60% percent of credit-card debtors say they have been in credit card debt for at least a year, up from 50% a year ago, according to a CreditCards.com report, cited by Bloomberg. The share of those who have been in debt for over two years also increased, to 40% from 32%, according to the online credit-card marketplace.

Non-revolving credit, paid off in installments, is also rising quickly, up 5.7% YoY through July, a 5-year high.

Banks continue to struggle with the yield curve, however, which remains persistently flat after the difference between the 10-year and 2-year US Treasury yields went below zero in July and has remained inverted since. The difference between the 10-year and 3-month yields, which Federal Reserve Chairman Jerome Powell himself says he prefers as a gauge of inversion, has managed to barely avoid falling into negative territory but is still signaling persistent flatness. A flatter yield curve is not optimal for banks because they typically borrow money at lower rates on the short end of the curve and lend at higher rates on the long end of the curve. The smaller the difference between these rates, the narrower the profitability of lending can be.

A September 12-19 Reuters poll of over 40 fixed income strategists and economists showed major sovereign bond yields trading near current levels in one, three, six and 12 months from now. However, given the backdrop of stubbornly high inflation, the bias was for yields to move higher, with much of the rise expected to come from shorter duration securities – those most sensitive to central bank rate hikes. That suggests a continually flat yield curve ahead and potential compression of margins for lenders.