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Defense Stocks Conversation with Scott Sacknoff, Manager, SPADE Defense Index (NYSE: ^DXS)

The question being asked is, "How should investors look at the terrorism events in Paris?"

Point Roberts, WA - NEW YORK, NY - January 20, 2015 (www.investorideas.com and Homelanddefensestocks.com) Investorideas.com, a global news source covering leading sectors including defense and security, issues recent commentary from Scott Sacknoff, President of Spade Defense Index (NYSE: ^DXS) following the recent Paris attacks and increased global terrorism events.

Scott Sacknoff manages the SPADE Defense Index (NYSE: DXS) which serves as the underlying index for PowerShares Aerospace & Defense ETF (NYSE: PPA). http://www.spadeindex.com/

The question being asked is, "How should investors look at the terrorism events in Paris?"

Scott Sacknoff, President of Spade Defense Index:

Terrorism is once again front and center in the news. The physical attacks in Paris in January 2015 were among a number that have taken place over the past few weeks, including a raid by Belgian authorities killing two suspected terrorists, an Ohio man who plotted to attack the U.S. Congress, satellite images showing that Boko Haram wiped out a number of villages in Nigeria, as well as their kidnapping of around 80 people in Cameroon; and of course, this doesn’t even mention any of the cyber-focused attacks, which are not addressed here.

The human impact to attacks such as these are of course clear but the financial/investing impact is less so. Identifying firms that benefit immediately after terrorist actions is not as easy as it sounds. Even after 9/11 almost all stocks in the United States declined immediately, including defense and security stocks. These rose once the situation stabilized a bit and plans to increase funding to combat the terrorists were announced. Still one can draw conclusions. A bombing on a plane will lead to increased security measures at airports; so firms that manufacture scanners, such as American Science and Engineering (ASEI) or OSI Systems (OSIS), should benefit and see increased orders over time. Likewise if a missile were to down a plane, there would be calls for installing anti-aircraft devices on commercial planes and so one would assume a rise in stocks of companies that manufacture those devices. But the correlation is not absolute. With a steady frequency of events, there is a history now that shows additional funding does not necessarily flow immediately following a terrorist event; one must consider the likelihood and availability of whether funds for the new contracts will come.

As another example, following several recent police interactions that led to deaths in Missouri, New York, and elsewhere, there was a call for the police to utilize video collection systems to record events in real-time. After statements from elected officials stating their willingness to allocate funds, one can see that there was an obvious rise in the stock price of Taser (TASR), which offers said product. Whether it can maintain these levels depends on whether municipalities deliver on their plans to buy their product.

Where security and defense stocks do benefit, consistently, is that the increased publicity of terrorist activities leads to an underlying sense that we are never totally safe. It is in this environment that spending on defense and security are considered an important part of government funding and the sector can operate within a stable budget environment. And a stable environment is one that benefits most firms.

Q: Investorideas.com:

Regarding Paris, are there technologies that investors should look toward that might be employed to prevent situations like what occurred?

A: Scott Sacknoff, President of Spade Defense Index

It appears from news reports, including an excellent summary in the New York Times, that the lead instigators in Paris were known to authorities, had been arrested, and were on terrorist watch lists. Over time, French authorities appeared to decide that after years of inaction, at least that they were aware of, it was no longer necessary to track these persons. No matter the technology employed, even those some believe cross the boundaries of personal freedoms, it is still the human element that sometimes makes the call.

Still technology is critical to helping identify potential problems, whether dealing with "lone wolf" actions of an individual, or small groups acting on their own or those associated with a terror cell or network. And even when it fails to identify the threat in advance, as it did in Paris or the Boston Marathon, technology solutions were critical to capturing the suspects and stopping them before they were able to pursue future attacks.

Key technologies in these efforts are analytics for mining big data including automated video analysis, and surveillance and reconnaissance systems and networks. All of these should see growth in the coming years. In the world of security, using statistical correlations and identifying patterns can be like looking for a needle in a haystack. Still money is flowing in this direction. The inherent value is known to commercial entities (to identify consumer trends and process efficiencies) as well as to the counterterrorism sector. Firms operating at the intersection of security, cyber, and big data include: Lockheed Martin, Booz Allen, CACI, and FireEye, to name but a few, as well as the more commercial IBM, HP, Amazon, Cloudera, and Splunk’s of the world.

Q: Investorideas.com:

Can you quantify investor reaction to these recent events?

A: Scott Sacknoff, President of Spade Defense Index

Significant inflows into the Powershares Aerospace & Defense ETF (NYSE: PPA), the fund that tracks the benchmark SPADE Defense Index, have been detected over the past year. However, considering the fund was up more than 48% in 2013 and nearly 12% in 2014, and the Paris attacks coincided with a broad global market decline, there is really no way to correlate gains in the fund with investors’ actions.

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