Interview – September, 2007

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

HDS: The past month has seen tremendous volatility on Wall Street but the SPADE Defense Index, a benchmark for companies involved with defense and homeland security remains near its all-time-high and is up nearly 20% in 2007. Once again we are joined by Scott Sacknoff, manager of the SPADE ® Defense Index, ticker symbol, DXS, who will update us on what is happening in the sector and some key events that investors should note. Mr. Sacknoff, thank you for joining us.

SMS: My pleasure Ann Marie.

HDS: The stock market has been volatile with regular triple digit moves in the Dow, down and then up and then down again. How have defense and security stocks done?

SMS: Relatively speaking, they’ve done quite well. The SPADE Defense Index, in the 3 rd quarter through the end of August, was beating the S&P 500 by nearly 6%. This was after gaining 10% in the 2 nd quarter, nearly 5% better. And even though the Index and the Powershares ETF (Aerospace & Defense -- AMEX: PPA) that tracks our index have seen their share of down days when the market has moved lockstep in one direction or another, what we’re hearing from analysts and investors is that defense stocks are in favor. One reason for this is that when the stock market is volatile, financial stocks are typically looked to as a defensive play. However, since what is moving the market are issues related to the credit markets and subprime loans, and many financial institutions have heavy exposure in this area, they don’t represent a safer haven. This is leading a number of investors to turn toward defense and homeland security equities.

HDS: And they consider it safer because…

SMS: …The sector is relatively independent of credit markets. In addition, with the government as its primary client, the sector receives much of its revenues from sources where a recession is less likely to have a direct or immediate impact.

HDS: So why do people sell defense stocks on down days?

SMS: Typically two reasons, first in sympathy to the overall market and secondly sometimes professional investors sell good to pay for bad. When no one wants to buy what you want to sell, if you need to build up a cash position, sometimes they sell products where there are buyers. Obviously with the index still trading a few percent below its all-time-high and the fact that there have been nearly 20% gains this year, buyers are interested in the sector.

HDS: Can you quantify this interest?

SMS: Easily, Trading volume during August in the Powershares Aerospace & Defense ETF (AMEX: PPA) was more than 7 million shares--easily its monthly record. In addition, assets in the ETF have now tripled since the beginning of the year and are about $330 million.

HDS: Going forward, what do you see as a key event for investors?

SMS: Well earlier this year, in our SPADE Investor newsletter we mentioned that a Congressman stated that a request for an additional $50 billion in supplemental funding was likely to occur later this year. Well according to sources, the White House will be submitting this sometime in the next month. This will obviously benefit many of the defense firms.

HDS: What about Iraq?

SMS: The next two months will see an increase in the discussion on the future of Iraq. Three reports are due to the be released in September – 1 from the GAO; 1 from General Petraeus, commander of the U.S. forces in Iraq; and 1 from retired Marine Corps General James Jones. In addition, several members of the Democratic leadership visited Iraq in August and it is believed that they came across some progress. The month will also see General Petraeus at hearings before Congress. Combined with 9-11 anniversary events, more details on the failed terrorist action in Germany, and the new Osama bin Laden tape, and defense and homeland security will be a top news story for the next month and beyond.

HDS: Taking a look at the top performing companies, can you see any themes?

SMS: Well three of the top 10 gainers in August were involved with defense IT. This is a group of companies that has lagged the sector for the last few years as DoD resources have shifted to Iraq. So it’ll be interesting to see if the returns by companies such as CACI and SRA signals a rebound in the sector. The top gainer overall for the year to date is Taser, which is up more than 88%. After eliminating many of its legal issues, it has rebounded nicely.

HDS: Lastly, any final thoughts?

SMS: Only a comment I came across from Pierre Chao, an analyst from the Center for Strategic and International Studies and an expert in defense industrial strategy. He points out that there is usually a 2 to 3 year lag between any downturn in defense funding and its impact on industry revenues. This means that many companies could see rising revenues for the next few years and that will give them the strategic breathing room to cope for a flat-to-lower budget environment that might develop in the future.

HDS: This has been great. Thank you for joining us today. If you 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.