Interview – September 07, 2006

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

HDS: With attention for the next several weeks on the 5th anniversary of 9/11 and Congress likely focusing on defense-related issues prior to adjourning for the fall, we turn to Scott Sacknoff, manager of the SPADE® Defense Index, ticker symbol, DXS to get his insight on these issues.

HDS: Mr. Sacknoff, good afternoon.

SMS: Good afternoon, Ann Marie.

HDS: As we approach the 5th anniversary of 9/11, the media will be devoting significant amount of time to discussing and analyzing it. What do you see as the main outcome?

SMS: 9/11 marked a shift in the perception of terrorism. There has always been terrorism, from the gas attack in 1995 on the Tokyo trains, to blowing up pizza parlors in the Middle East, to bombings in Europe. What 9/11 did was create a perception, particularly in the United States, that it is no longer ‘their problem’ but ‘our problem’. It also ‘put on a face’ on a problem that affects Western nations around the globe.

HDS: With all that has been done since then, what are the top areas of concern?

SMS: Efforts by the U.S. government have focused on two main areas of improving homeland security – those that cause widespread disaster and those of a more local nature. Much of the resources allocated by the U.S. government have been spent to prevent weapons of mass destruction, which is why so much attention has been focused on port security and border security. The impact of a biological or radioactive device detonated on U.S. soil is beyond comprehension. The second area is identifying acts employing explosives and attacks of a more local level. These can usually only be stopped via intelligence and surveillance efforts as the recent success by United Kingdom authorities shows.

HDS: Doesn’t the ability of the Department of Homeland Security to react to incidents such as bringing volatile liquids on aircraft, benefit us and make us safer?

SMS: Not necessarily. Security for the sake of security is not security. Without airports having the proper technology to scan for liquids or explosives and without them searching every carry-on bag, the restrictions placed don’t really add to security.

HDS: Have you personally found it easy to get liquids on a plane?

SMS: I’d rather not comment on that. [smiles]

HDS: So how effective has DHS been since its creation following 9/11?

SMS: Much of it has been a cosmetic, political exercise to force collaboration among agencies. This has led to some improvements but there is still significant work to be done. New technology, intelligence gathering and interpretation, and profiling are the keys to success. Unfortunately, Congress is already planning to reduce funding for DHS’ Office of Science & Technology because of issues related to its management and operation.

HDS: From an investor standpoint, how has the sector performed?

SMS: The largest contractors to DHS, as we highlighted in our newsletter, have been companies that are heavily involved with the Department of Defense. With the rise in defense spending since 2002, their market capitalization has benefited substantially. The small- and mid-cap security companies that are involved in areas such as biometrics, airport and border security have trended upward as the additional spending in this area has benefited them. Short-term investors will notice that these companies have also been subject to substantial swings in pricing as companies trade on news and valuations fluxuate.

HDS: As Congress works on its FY-08 and beyond budget, what do you expect to see?

SMS: The overall budget for Homeland Security has risen by about $2 billion annually for the last few years. It is unlikely that either the current leadership in Congress or those that are elected in November will vote to hold steady or reduce funding for homeland security. Politicians do not want to be viewed as being weak in this area. Keep in mind that overall spending on defense and homeland security is approaching the $500 billion level and this provides opportunities for a number of firms.

HDS: From a perspective of where technology is contributing towards a military advantage i.e. innovations in surveillance, search and rescue, combat, etc., can you give us a sense as to where you see the government spending going in this environment?

SMS: Research spending by the military is predominantly in two areas -- those that protect and defend soldiers and equipment that are put in harm's way and similarly those that enable the military to operate at a distance, once again the concept is to take soldiers out of harm’s way. In the first case, there are considerable resources going into areas such as body armor, armor plating for more durable ground equipment, electronic and physical countermeasures, and equipment that enable soldiers to share information to improve field operations and reduce friendly fire. The second areas shows an increase in funding for remote systems such as Unmanned Aerial Vehicles or drones that enable the military to perform surveillance and engage the enemy at a distance, land robotic and unmanned ground and sea vehicles with surveillance and search and rescue capabilities, and electronics that more accurately hit their target to reduce damage to nearby systems and reduce civilian casualties.

HDS: For those investors interested in the sector, what do you suggest?

SMS: If the risk associated with an individual company is a worry but they want exposure to the market, then the investor should consider products that offer diversified exposure to a number of companies in the sector. One such example is the Powershares Aerospace & Defense Portfolio ETF of which the SPADE is the underlying Index. The ticker for this fund is ‘PPA’ and it gives investors in it, a stake in more than 50 companies operating in defense and homeland security. Before investing in any product, investors should review the prospectus as not every investment is appropriate for every investor.

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 http://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’.

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.