Interview – March 28, 2006

HDS: Hi this is Ann Marie Fleming with HomelandDefenseStocks.com

HDS: In today’s discussion with Scott Sacknoff, manager of the SPADE® Defense Index (AMEX: DXS), we will be discussing how investments in homeland security and defense have performed, the port controversy and what companies are positioned to benefit in this area, along with a new technology solution being implemented to improve port security.

HDS: So tell us, how are investments in homeland security and defense performing?

SMS: Investors who bought the Powershares exchange traded fund (AMEX: PPA) that tracks our SPADE Defense Index have been doing quite well. Since the October 2005 launch of the ETF, the Index is up more than 14%. In fact, the Index has already hit 16 all-time highs this year, after setting 25 all-time highs in 2005. Now mind you, that’s all-time highs, not just 52-week highs or multi-year highs.

What’s interesting about this is that many analysts and journalists had been wondering last year if the sector had peaked. Barrons feature article on July 18, 2005 is an example. Obviously investors who ignored this advice have done quite well. Trading under the symbol ‘PPA’, the ETF opened on October 25, 2005 at $15 a share. Today, it is trading at $17.22.

While past performance is not indicative of future gains, there are a number of positive trends. In particular, the recent defense budget proposal, ongoing world instability, and a need to invest and replenish our defensive and security capabilities. In addition, a number of the constituents of the SPADE Defense Index have reported record revenues and earnings and appear to be as financially healthy as they have ever been.

An interesting statistic came across my desk earlier today. Gabriel Wisdom, an investment advisor, stated in his March 20, 2006 blog that, “There is a 22 year War Cycle that traces all the way back to 600 B.C. The odds of this cycle occurring purely by chance are only 8 in 10,000.” If this quote is true, and September 2001 is our start date, the bottom would still be many years away.

HDS: How have investors reacted to the availability of the fund?

SMS: We have seen some positive signs as institutional and professional investors have begun putting resources in this area. Trades of tens of thousands of shares at a time are becoming more commonplace and overall volume has risen from around 21,000 shares a day on average in January to more than 100,000 in February, with more than 70,000 shares a day so far in March. But considering the shear number of investors out there who should think about including a defense and homeland security-related fund as a core element to their portfolio or who are interesting in the sector but don’t realize the ease and flexibility that an ETF product offer, there is still plenty of product and sector education to go. While the largest companies operating in this area – Lockheed Martin (LMT), Northrop Grumman (NOC), General Dynamics (GD), and Raytheon (RTN) – are well known to investors, many of the 50+ companies in the SPADE Defense Index remain an unknown.

HDS: Let’s move over to the ports controversy. What were your impressions?

SMS: Most of the issue was a perception of a problem rather than a major security violation. In practice, the Coast Guard and Customs provide the security and the union only employs workers who are U.S. citizens and pass personal security checks. That being said, a good operations person would be able to suggest days where security would be more lax – such as times when the most diligent workers are on vacation or perhaps even when the NCAA basketball tournament is TV and diverts attention ever so slightly. That being said, it is in the business interest of foreign ports to ensure that nothing unintended gets through. Shutting off a port and delaying the future entry of ships from a specific destination would have a profound effect on international trade and translate into billions of dollars of lost revenue. So it is in the interest of foreign ports to ensure security on their end.

HDS: From a U.S. business perspective, what do you expect will happen in this market?

SMS: For some time now, port security has been seen as a weak element in the U.S.’ overall strategy to secure our borders. While a process is in place and no major incidents have occurred, with only 5% or so of cargo being inspected, there is an element of concern. We can expect that the increased attention that this scandal has provided will lead to additional resources being allocated in this area. Jim Cramer of CNBC’s ‘Mad Money’ cited OSI Systems (OSIS: Nasdaq), L-3 (LLL:NYSE), Viisage Technology (VISG:Nasdaq) and FLIR Systems (FLIR:Nasdaq) as companies that manufacture scanners and devices that could benefit from increased spending in this area. All, by the way, are constituents of the SPADE Defense Index.

HDS: What about new technologies in this area?

SMS: One of the more interesting technologies that is being developed is a monitor built directly into the liner of cargo containers that would be capable of sensing temperature, pressure changes, radiation, and positioning and would relay these signals via satellite to a central monitoring facility to ensure that noone tampers with a container. While the device currently adds 50% to the overall cost of a container, it is likely that this figure would decline over time. In the meantime, IBM and GE are working with major cargo carriers to work out the bugs in this technology.

HDS: Very interesting. Well thank you for taking the time today. We look forward to more insight the next time we chat.

SMS: You’re most welcome. For your clients interested in getting more information on the SPADE Defense Index, please visit www.spadeindex.com. Investors should note that the exchange traded fund trades under the symbol ‘PPA’ and historical data on the SPADE Defense Index can be found using the index symbol ‘DXS’.

For additional information on the SPADE Defense Index, visit www.spadeindex.com. The Index is listed on the American Stock Exchange under the symbol ‘DXS’. Information on the exchange-traded fund (ETF) tracking the Index can be found at www.powershares.com. The ETF trades under the symbol ‘PPA’.

Disclaimers: The information presented in this interview is for informational purposes and should not represent a solicitation or an offer to purchase an investment product. SPADE and the SPADE Defense Index are registered trademarks of the ISBC. Powershares is a registered trademark of Powershares Capital Management.

For More Information:

Dawn L. Van Zant - President
800.665.0411 – dvanzant@investorideas.com 

Ann-Marie Fleming – Corporate Development
866.725.2554 – afleming@investorideas.com