Interview – February 1, 2006


Welcome, this is Ann-Marie Fleming with HomelandDefenseStocks.com

In today’s discussion with Scott Sacknoff, manager of the SPADE® Defense Index (AMEX: DXS), we will be talking about the forthcoming U.S. federal budget for fiscal year 2007, special considerations for investors in a government budget-driven industry, and also recent world events.

Q> Before we get started, how is the SPADE Defense Index performing?

A> The first couple of weeks have seen some volatility in the Index as well as in the broader market. Both are up a couple of percent at this point in time. When we ran performance results for 2005, it showed that the SPADE Defense Index outperformed the broader market, as measured by the S&P500, for the sixth consecutive year and in 18 of the last 22 quarters. For 2005, the Index was up 5.30%.

Q> Which brings us to the budget for FY-07. The President is due to release his budget in the first week of February and there has been a lot of chatter that defense budgets will decline as the war in Iraq winds down. What do you think will happen to the DoD budget and that for the Department of Homeland Security?

A> I think there is a general consensus that the DoD budget, scheduled for release on February 6th, will show a reduction in planned spending. A number of analysts are expecting something on the order of $30 to $50 billion. When looking at this figure, there are three things that investors need to keep in mind:

First, that the decline is based on what has already been approved. The FY-06 budget showed an additional $90 billion in planned spending through FY-11. An announced decline of $30 billion would translate into a real gain of $60 billion over the coming years.

Second, that the budget is only a proposal. Over the coming months there will be a lot of discussion that will adjust the budget as members of Congress negotiate. The figure that ultimately matters is what the President finally signs.

Third, it is likely that some of the decline will come from orders for new planes, fighters, or ships -- in programs where contracts have not yet been issued and production has not yet begun. This means that current manufacturing is not affected and funded backlog is not affected. What is affected is ‘unfunded backlog’, a category probably unique to companies that rely on government contracts and related to contracts that are expected but not yet authorized. It is something that could (or could not) affect the performance of the firm some quarters or years in the future. Whereas a change to funded backlog would immediately affect performance, a change to unfunded backlog remains a future question.

Q> What do you expect for the Department of Homeland Security budget?

A> Since the creation of DHS, its budget has nearly doubled to around $40 billion. Politically, it would be unacceptable for someone in Congress to take a stand and call for a reduction in DHS spending. What you will most likely see is a gain of a few percent, increasing the budget by a few billion dollars.

In the coming year, there will be a greater oversight of the agency and how the money is being spent. A focus on projects and activities that receive public attention and an awareness that America is becoming safer is likely. As new elections approach, this is an important issue to the current administration, as it does not want failures in homeland security to become an issue.

Q> For investors, your comments indicate that you believe the run is not over.

A> There has been great gains in the past few years and many believe that a slowdown in growth is expected. Is the sector set to decline? I think it is unlikely. Just look at the world events in the past few weeks. Even as the administration states that we are winding down our operations in Iraq, new situations are arising -- with Iran stating they are pursuing nuclear technology and Hamas gaining power in Palestine. If anything, the region appears to becoming more destabilized. For those investing in defense and security and worried about an overall real-dollar reduction in the upcoming budget, it does not appear that this will be an issue.

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