Interview – December 07, 2007

HDS: Hi this is Dawn Van Zant with HomelandDefenseStocks.com.

HDS: As the stock market rebounds from a correction that saw declines in the broader markets and many market sectors of 10 to 20 percent, investors in defense and homeland security have probably slept better than most. We are once again joined by Scott Sacknoff, manager of the benchmark SPADE® Defense Index, whose Index is up more than 26% year-to-date in 2007 and is roughly 3% from its all-time-highs.

Considering this volatility, we thought that we’d center our discussion on how economic issues such as the subprime loan market, the dollar decline, and a possible recession affect the defense and homeland security sector. We also get his comments on several stocks that have led or lagged the sector.

Mr. Sacknoff, thank you for joining us.

SMS: My pleasure Dawn.

HDS: So before we get started, can you give us additional details on how the SPADE Defense Index has done in this market?

SMS: We started November up more than 29% for the year, roughly 20% better than the broader U.S. markets. From its high on the 9th of October to its low on the 21st of November, the Index dropped roughly 8 and a half percent. However, the defense sector has shown remarkable resilience in past market sell-offs and since hitting a low, it has recaptured more than 5%.

HDS: What do you think is behind this resilience?

SMS: Essentially that most of the issues creating pressure on the U.S. economy – the subprime mortgage loan crisis, the decline in the U.S. dollar against foreign currencies, and talk of a forthcoming recession have less of a direct connection to the market for defense and homeland security products and services than it does elsewhere, so the sector has tended to decline less and rebound quicker.

HDS: Can you explain what you mean by a direct connection?

SMS: Sure. For instance, the subprime loan mortgage issue directly affects banks that issue this consumer product but it also affects other financial institutions that invest in these products. Corporate real estate is less affected but if financial institutions employee fewer people, they need to rent smaller offices. Defense spending is really not part of the equation.

HDS: Like the decline in the U.S. dollar?

SMS: Correct. While international sales by U.S. defense contractors are rising, most of the business in the sector is generated by U.S. government contracts that are issued in U.S. dollars and spent on activities inside the U.S. In the defense sector, international exchange rates have minimal impact. This is in contrast to commercial aerospace where a lower dollar has benefited the sale of aircraft.

HDS: And recession?

SMS: While severe impacts to the economy can affect government spending, spending on defense remains a key, vital function of government and tends to be a factor more of how secure the government feels the U.S. is and less a factor of the economy itself.

HDS: Talk to us about some of the companies who’ve had the biggest movements lately.

SMS: Among the top gainers this year are EDO (NYSE: EDO), who received a buyout offer from ITT (NYSE: ITT), FLIR Systems (NASDQ: FLIR) whose stock is up more than 100% this year and which is due to have a stock split later in December, and Stanley (NYSE: SXE) whose stock has also doubled due to several recent contract wins. On the downside many of the other defense IT firms, CACI (NYSE: CAI), SI International (NASDQ: SINT), and MTC Technologies (NASDQ: MTCT) have suffered as DoD continues to divert funds toward Iraq. Meanwhile, Force Protection (NASDQ: FRPT) saw its stock decline nearly 40% in November as the Marines reconsider the quantity of MRAP vehicles it wants. Armor producer Ceradyne (NASDQ: CRDN) and heavy truck manufacturer Oshkosh Truck (NYSE: OSK) also saw double digit declines in November.

Next month, in January, your listeners should know that I’ll be back with a recap of 2007 and present a number of trends and statistics.

HDS: This has been great. Thank you for joining us today. If and of our listeners are interested in getting more information about the SPADE Defense Index, please visit www.spadeindex.com. Historical data for the index can be found using the index symbol ‘DXS’.

And as always, the information presented in this interview is for information purposes and should not represent a solicitation or an offer to purchase an investment product. Investors interested in the Powershares ETF trading under the ticker ‘PPA’ should visit the powershares.com website for a prospectus.

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.