HDS> What do the events in Israel and the Middle East mean for investors in defense and homeland security?

SMS> The initial reaction by investors when the world experiences a destabilizing event is to sell equities as the market drops on the news followed by a rise in the shares of companies involved with defense and homeland security. A review of the performance of the SPADE Defense Index over the last several years shows continued strength in companies involved in these areas. Taking the weeks following 9/11 as an example, equities in the sector immediately fell with the broader market but rebounded once people realized that this would lead to increased government spending in the area. After the terrorist train bombings in London and Spain, the sector didn't react immediately but the events added to the ongoing sentiment that the real and perceived threats in the world would continue.

HDS> What's the direct effect of what is happening in the Middle East on U.S. firms?

SMS> As a leading exporter of defense equipment to the world, especially to Israel, companies exporting there should see orders for replacement parts and equipment to replace that which is being used. Lockheed Martin and Raytheon are two firms that supply a range of products to Israel. Were the conflict to expand into Iran and Syria, it would likely bring some reaction by the United States. Similarly, nearby countries such as Egypt, Jordan, and Saudi Arabia which have relationships with Israel and the United States could also end up in the foray. In these cases, U.S. aid and overall spending on defense systems would rise. If the end result is a destabilized region or one where tensions continue to be high, then the forecasted slowing in the growth of U.S. expenditures on defense might be delayed.

Recent comments by Lockheed Martin executives predict near-term funding will rise regardless of who is in Congress and the White House. Based on the FY-2007 budget which called for increased defense spending of nearly $90 billion over the next five years, even a decline in the budget would mean increased funding. A number of analysts are expecting defense companies to report double digit growth during the 2nd quarter reporting season.

HDS> What about spending on domestic homeland security?

SMS> The situation in Israel and the Middle East is not likely to have a direct effect on U.S. domestic spending on homeland security. While the budget for the Department of Homeland Security is expected to continued rising by a few billion dollars annually, the issue that could limit this is their perceived failure to allocate the resources it receives wisely.

HDS> Thank your for this update.

About the SPADE Defense Index

The SPADE Defense Index® (AMEX: DXS) is a modified capitalization-weighted index comprised of publicly traded companies that benchmarks the performance of companies involved with the defense, homeland security, and space marketplace.

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