Monday, September 17, 2012

Q&A Interview with Scott Sacknoff of the SPADE Defense Index (NYSE: ^DXS)

New York, New York - September 17, 2012 ( Newswire,, an investor research portal specializing in sector research including defense and Homeland Defense stocks issues a recent interview with Mr. Scott Sacknoff of the SPADE Defense Index (NYSE: ^DXS).

Scott Sacknoff manages the SPADE Defense Index (NYSE: ^DXS), a benchmark for investing in the aerospace and defense sector. It has been licensed to Powershares whose Aerospace & Defense ETF (NYSE: PPA) tracks the performance of the Index. staff
Q. Thank you for joining us today. Where do you see the defense market at this time?
Scott Sacknoff, SPADE Defense Index
From a news perspective, most of the attention for the past several months has focused on the impact of sequestration and the fiscal cliff that could occur at year's end; and rightly so. Were it to occur, the impact would be severe, costing well more than a million defense-related jobs and new budget cuts in excess of $50 billion annually over the next decade (or, of course, until Congress changes the plan).  What it means is that investors interested in the sector have been playing it very cautiously.  Trading volumes are down significantly.  Small cap defense stocks as a whole continue to underperform as they have for the past several years although there are some signs of life.  From a historical valuation perspective, aerospace and defense stocks remain highly attractive and, thanks to the calendar roll-over, PPA, which tracks the industry benchmark SPADE Defense Index is hovering near 52-week highs.
What do you see as the likelihood of a deal that fixes sequestration issue?
Scott Sacknoff, SPADE Defense Index
I'd like to thank that beyond political posturing, most of our elected officials believe in doing what's best for our country.  Is there waste that could be cut at federal agencies, of course.  However, deliberately pushing our country into recession and double digit unemployment, well that's just insanity.  The reality is that I fear that the fix will come not only after the election but after the new Congress takes office in January and they work on a retroactive solution.  Unfortunately, from an investing perspective, by then the damage will have been done and a big drop in the market would have occurred.  If a solution is reached before the election or immediately thereafter, then there are a number of positives for the sector.
So shifting from politics, share with us some bright spots in A&D.
Scott Sacknoff , SPADE Defense Index
As anticipated, commercial aerospace is hitting on all cylinders and once the political issues surrounding the U.S. election are lifted, I'd expect revenues and profits to shift sharply higher.  Boeing has announced increased production levels for the 787 and 737 over the next two years and its new 737 Max has been very well received by the global airlines. This should lead to continued growth in aerospace manufacturing levels through the end of the decade.
Barring sequestration, what do you see for the U.S. defense budget?
Scott Sacknoff , SPADE Defense Index
The specifics are still a bit cloudy. The trend for defense spending has been flattening after the sector grew post-9/11 for nearly a decade. Near-term some decline in total U.S. defense spending is a given as DoD seeks to restructure in a post-war environment while trying to prepare for new and anticipated threats; and all the while try to reduce total spending. An earlier budget  deal agreed to with Congress will see a savings of around $500 billion over the next decade, but the defense leadership sees this level as being manageable with most of the cuts coming from restructuring and eliminating waste.  In fact, as orders from international governments continue to rise, to the tune of more than $60 billion in 2011, I expect this growing line of business could offset some of the effects of the budget restructuring.
And the firms?
Scott Sacknoff , SPADE Defense Index
Unlike the post-Soviet collapse era, defense firms have had several years to improve their fiscal situation, shed or spin-off lower margin businesses, and acquire firms to better position themselves going forward.  With valuations low and cash-on-hand high, most companies are very healthy and could ride out this downcycle without major issues.  With margin expansion, we could even see their prices rise over time.
Lastly, how will the presidential election impact the sector?
Scott Sacknoff , SPADE Defense Index
The truth is everything said now is just political posturing. Historically, the defense budgets rise and fall based on the current state of the world and not which party controls the White House.  Budgets rose during Vietnam (Kennedy, Johnson) and fell post-Vietnam (Carter), rose with Cold War tensions (Reagan) and fell after the Soviet collapse (Bush, Clinton), started rising when the cuts seemed to deep (Clinton) and rose post 9/11 (Bush). The budget is likely to see some cuts due to debt reduction and would rise in the event of an Iran nuclear situation or another terrorist attack. Ultimately, it won't matter who is President, it’s the world that matters.
Thank you for your time.
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