WM E.

RHODES
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Rhodes Analytics
Investment Strategy & Market Analysis for Professional Investors

Thursday, June 2, 2005

Revolution
Der Spiegel is reporting that Deutsche Telekom (Xetra: DTE GR, 15.17; ADR on NYSE: DT US, US$ 18.50) is once again accepting D-Marks in its public telephones. We understand from one of the reporters at Bloomberg that this is part of a marketing effort, but the timing makes us a tad bit uncomfortable. The French and Dutch have revolted. French voters rejected the proposed EU constitution by 5 to 4, the Dutch by almost 5 to 3. France and The Netherlands will not cut loose from the Continent and float away to America, nor even to Britain, either in politics or in economics. Polls signaled that the French referendum on the EU constitution would fail for most of the past two months. We suspect that vote is already factored into the currency markets. A weaker euro makes export markets harder on many US manufacturers and should generally improve the competitive position of European companies. The euro will remain a confederate currency for now. Risks that the US dollar will be damaged or supplanted as the reserve currency have been pushed into the future.
Polling on EU Consitution in France
58%

60%

After polling almost 3:2 in favor of the EU constitution, the French electorate has voted 5:4 against it. We note that as late as early April, one out of five people asked refused to answer one pollsters questions. The figures for non could be associated with the unpopularity of President Chirac.

56%

Likely Non Likely Oui

54%

52%

50% 2/1/05 48%

3/1/05

4/1/05

5/1/05

46%

44%

42%

40%

Copyright 2005 Wm E. Rhodes. All rights reserved. All information comes from sources believed to be reliable, but we cannot guarantee its accuracy. This is not an offer to buy or sell any securities. For private circulation only. At any time we or any of our employees may own or have a position, subject to change, in any securities or investments described herein. Unless otherwise stated, all views expressed herein (including estimates or forecasts) are solely those of Rhodes Analytics and subject to change without notice. This report does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive it. Remember that past performance is not necessarily a guide to future performance. One Washington Mall, 6th floor, Boston, Massachusetts 02108

Rhodes Analytics

Investment Strategy & Market Analysis for Professional Investors

Thursday, June 2, 2005

page 2

Revolution
Late spring in Paris, and the Tennis Courts are well, probably less than full. Le serment du jeu de paume The Tennis Court Oath 20 June 1789, as depicted by David. (Appropriately enough, the picture is in the public domain in the United States.) Despite political rhetoric to the contrary, we suspect that events following this weeks referenda will be less dramatic than those of 216 years ago.

In France, opposition to the EU constitution was led by the political Left. Many Non partisans are opposed to President Chirac; even the leaders in his own party wavered in support of the EU constitution. In The Netherlands, however, the political Right led opposition to the constitution, citing perceptions that the Dutch have lost control of their destiny, a sense of uneasiness in the aftermath of the murder of Theo van Gogh in broad daylight in an Amsterdam street by a Dutch-born Islamist, and death threats against politicians who have spoken out against Islamicism in The Netherlands.

Political rhetoric surrounding the outcome of this weeks referenda in France and The Netherlands is hyperbolic: one widely-publicized quote is that rejection of the constitution would be a catastrophe for France, for Chirac and for the whole world. We beg to disagree on the first and third assessments. The United States Constitution consists of fewer than 6,000 words and can be easily printed on 20 pages.1 In English, the Treaty establishing a Constitution for Europe is 855 pages long and has an English construction of 157,327 words, including Protocols and Annexes I and II and Declarations to be annexed to the Final Act of the Intergovernmental Conference and the Final Act, both of which would presumably also be included in European constitutional law if approved and enacted as is.2 The proposed European constitution is more than 26 times the length of the corresponding American document. Such a complicated document seems to us an invitation for endless mischief bad for business, bad for justice, and bad for liberties won through centuries of blood and carnage. Imagine litigating a 160,000-word constitution in 24 languages: we Americans fight one another like junkyard dogs working with only a 6,000-word constitution in one language.
1 2

Source: http://www.house.gov/Constitution/Constitution.html Source: http://www.unizar.es/euroconstitucion/Treaties/Treaty_Const.htm; or http://europa.eu.int/constitution/en/allinone_en.htm. The Draft Treaty establishing a Constitution for Europe on the official website of The European Convention (http://europeanconvention.eu.int/DraftTreaty.asp?lang=EN) has been superseded, or as Americans occasionally opine in the quaint parlance of colonials: overcome by events.

Copyright 2005 Wm E. Rhodes. All rights reserved. All information comes from sources believed to be reliable, but we cannot guarantee its accuracy. This is not an offer to buy or sell any securities. For private circulation only. At any time we or any of our employees may own or have a position, subject to change, in any securities or investments described herein. Unless otherwise stated, all views expressed herein (including estimates or forecasts) are solely those of Rhodes Analytics and subject to change without notice. This report does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive it. Remember that past performance is not necessarily a guide to future performance. One Washington Mall, 6th floor, Boston, Massachusetts 02108

Rhodes Analytics

Investment Strategy & Market Analysis for Professional Investors

Thursday, June 2, 2005

page 3
Should the amount of constitutional litigation in the European Union relative to that in the United States following a ratification of this document be in any way other than inversely proportional to the number of words in their respective constitutions, once France voted non, European stocks ought to have rallied sharply Monday, and May 29 be ever after celebrated, by succeeding Generations, as the great anniversary Festival. It ought to be commemorated, as the Day of Deliverance by Solemn Acts of Devotion to God Almighty. It ought to be solemnized with Pomp and Parade, with Shews, Games, Sports, Guns, Bells, Bonfire and Illuminations from one End of [the] Continent to the other from this Time forward forever more.4 And while we offer that observation partly in jest, we offer it also in earnest and in all seriousness: the proffered document seems, to our simple American mind, much too complicated. We believe France and Holland might be providing the rest of Europe a service, whatever their motivations. We hope our European friends may yet construct a Constitution that is ratified, as Dr. Franklin wrote of another controversial proposal, because I expect no better, and because I am not sure, that it is not the best.5

The Bureau of Labor Statistics estimates there are over half a million attorneys in the United States and close to another half-million employed in other legal services.3 As a thought experiment, if litigation and adjudication should consume 26 times as many resources in the EU under the proposed constitution as in the US, one in every 22 Europeans would be a barrister, and altogether one in 12 would be employed in legal services.

John Hancock of Massachusetts, who boldly endorsed Revolution, and fiery orator Patrick Henry among others led opposition to the US Constitution. Henry, then Governor of Virginia, strove to convince the Virginia legislature to defeat it. North Carolina at first balked at ratifying the new federal republic. Rhode Island actually voted to reject it in town meetings on 24 March 1788 by a tally of 2,708 to 237 (over 11 to 1), the only direct vote on the Constitution held under the Ratification of the US constitution was an effort, too. Articles of Confederation. After the first 10 amendments were added (our Bill of Rights), a Rhode Island convention finally ratified the constitution by a vote of It was opposed by many 34-32 on 29 May 1790: more than a year after Washington was inaugurated prominent Revolutionaries. president, after the United States Senate threatened to sever normal commerce with Rhode Island on the grounds that it was a foreign nation, and then only when 4 delegates against ratification were either absent or abstained. Without apologies to Eric Idle, Bring out your dead! We believe the goal of a European federal union is not dead yet. As for the Euro, it was a confederate currency last Friday; it has been a confederate currency since its inception; and it will remain a confederate currency for the foreseeable future. We believe that it is in the tendency of confederate currencies to weaken over time; however, the Euro strengthened in anticipation of federalization; from a policy of high interest rates at the ECB; and in reaction to moves by central bankers, particularly in Asia, to diversify their currency exposure. These three pillars of strength are now in question: federalization is taking longer than expected; the resolve of the ECB is under test; and central bankers are watching for clarification of these two issues.
3

U.S. Department of Labor, Bureau of Labor Statistics, Occupational Employment Statistics, November 2003 National Occupational Employment and Wage Estimates, Legal Occupations, http://www.bls.gov/oes/current/oes_2 3le.htm

John Adams to his wife Abigail Smith Adams, July 3, 1776, housed today at the Massachusetts Historical Society, http://www.masshist.org/adams/manuscripts_2.cfm (John Adams thought July 2 would be the day Americans celebrated.) 5 Benj. Franklin, 17 Sept 1787, http://www.usconstitution.net/franklin.html. Franklin, then 81 years old, was too weak to speak; Dr. James Wilson read his address to the Constitutional Convention.

Copyright 2005 Wm E. Rhodes. All rights reserved. All information comes from sources believed to be reliable, but we cannot guarantee its accuracy. This is not an offer to buy or sell any securities. For private circulation only. At any time we or any of our employees may own or have a position, subject to change, in any securities or investments described herein. Unless otherwise stated, all views expressed herein (including estimates or forecasts) are solely those of Rhodes Analytics and subject to change without notice. This report does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive it. Remember that past performance is not necessarily a guide to future performance. One Washington Mall, 6th floor, Boston, Massachusetts 02108

Rhodes Analytics

Investment Strategy & Market Analysis for Professional Investors

Thursday, June 2, 2005

page 4

USD

100

90

80 01/01/2001 10/01/2001 07/01/2002 04/01/2003 01/01/2004 10/01/2004

Our US dollar index model, which tracks the FINEX DX future, has been comfortably positive for some time.

6 4 2 0 -2 -4 -6 01/01/2001 10/01/2001

US Dollar model signals

07/01/2002

04/01/2003

01/01/2004

10/01/2004

1.0 0.9

01/01/2001 6 4

10/01/2001

07/01/2002

04/01/2003

01/01/2004

10/01/2004

Euro model signals

Our Euro model deeply depressed. It missed the runup in the Euro in mid-2004.

2 0 -2 -4 -6 01/01/2001 10/01/2001 07/01/2002 04/01/2003 01/01/2004 10/01/2004

Copyright 2005 Wm E. Rhodes. All rights reserved. All information comes from sources believed to be reliable, but we cannot guarantee its accuracy. This is not an offer to buy or sell any securities. For private circulation only. At any time we or any of our employees may own or have a position, subject to change, in any securities or investments described herein. Unless otherwise stated, all views expressed herein (including estimates or forecasts) are solely those of Rhodes Analytics and subject to change without notice. This report does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive it. Remember that past performance is not necessarily a guide to future performance. One Washington Mall, 6th floor, Boston, Massachusetts 02108

Rhodes Analytics

Investment Strategy & Market Analysis for Professional Investors

Rhodes Analytics (c) 2005 - www.rhodesanalytics.com - All rights reserved. - Wed 1 Jun 2005

Strength 6 3 1 1 -3 -3 -5

Mnemonic USD JYS Gold CAD CHF GBP EUR

Currency US Dollar Japanese Yen Gold Canadian Dollar Swiss franc Pound Sterling euro

Euro in USD

Rhodes Analytics (c) 2005 - www.rhodesanalytics.com - All rights reserved. - Wed 1 Jun 2005

Strongest Weakest

Thursday, June 2, 2005

Relative Price of Materials vs S&P 500
0.20

page 5

The relative price of the Materials sector is the most strongly correlated in to movements in the Euro. (See the table on page 6.) We consider this sector a strong underweight.

0.10 0.09 0.08 01/01/1992 01/01/1994 01/01/1996 01/01/1998 01/01/2000 01/01/2002 01/01/2004

Overbought / Oversold Index

2

-1

01/01/1992

01/01/1994

01/01/1996

01/01/1998

01/01/2000

01/01/2002

01/01/2004

Intermediate Indicator
1.4

The intermediate indicator for this index is weak and appears to be faltering. We are watchful.

1.2

1.0

0.8

01/01/1992 1.0 0.8 0.6 0.4 0.2 0.0 01/01/1992

01/01/1994

01/01/1996

01/01/1998

01/01/2000

01/01/2002

01/01/2004

Stochastics

01/01/1994

01/01/1996

01/01/1998

01/01/2000

01/01/2002

01/01/2004

There are 12 industries in the Materials sector. Here are their relative sizes, and our notational ranking for overweight and underweight. (See page 7 for an explanation of our overweights and underweights.)

Diversified Chemicals Industrial Gases Specialty Chemicals Construction Materials Metal & Glass Containers Paper Packaging Aluminum Diversified Metals & Mining Gold Steel Forest Products Paper Products

vs S&P vs sector 1.02% 36.07% 0.26% 9.34% 0.26% 9.11% 0.05% 1.89% 0.07% 2.42% 0.10% 3.63% 0.22% 7.71% 0.13% 4.49% 0.13% 4.69% 0.14% 4.79% 0.17% 5.98% 0.28% 9.88%

Copyright 2005 Wm E. Rhodes. All rights reserved. All information comes from sources believed to be reliable, but we cannot guarantee its accuracy. This is not an offer to buy or sell any securities. For private circulation only. At any time we or any of our employees may own or have a position, subject to change, in any securities or investments described herein. Unless otherwise stated, all views expressed herein (including estimates or forecasts) are solely those of Rhodes Analytics and subject to change without notice. This report does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive it. Remember that past performance is not necessarily a guide to future performance. One Washington Mall, 6th floor, Boston, Massachusetts 02108

Rhodes Analytics

Investment Strategy & Market Analysis for Professional Investors

Rhodes Analytics (c) 2005 - www.rhodesanalytics.com - All rights reserved. - Wed 1 Jun 2005

Our 13-week normalized rate of change oscillator is in nearoversold territory.

Thursday, June 2, 2005 Many factors influence exports: global economic growth and more expansive trade agreements have lifted exports after accounting for US inflation; but there remains a sizable imbalance between imports and exports, for which our trading partners accept US dollars to be invested in dollardenominated assets. A weaker dollar achieved without excessive volatility was a boon to exports by way of more competitive prices without too much inflation. A weaker euro coupled perhaps with more restrained global growth might slow exports.
50%

page 6
CPI deflated US Exports to the Rest of the World, year to year

40%

30%

20%

10%

0% 1970 -10%

1975

1980

1985

1990

1995

2000

2005

-20%

-30%

As the SPD-Grne alliance in Germany weakens, and in the wake of the referendum in France, questions have arisen about whether the Germans will stay in the Euro should the government of Chancellor Gerhard Schrder and Joschka Fischer give way to a conservative alliance led by Dr. Angela Merkel. Bundesbank and the finance ministry have denied that they participated in a meeting this week with private economists in which the possibility of exiting the Euro was discussed. The problem of a weaker Euro is the same as the problem of a weaker US dollar last year: if declines in the Euro are reasonably smooth, without sudden breaks in exchange rates or jumps in volatility, increased capital flows back into US dollar investments should be to the benefit of US securities. Shifts in Euro exchange rates should not constitute a problem unless they become chaotic.
Information Technology Health Care Financials S&P Mid Caps Consumer Discretionary S&P 1500 Industrials S&P Small Caps Telecommunication Services Consumer Staples Utilities Energy Materials EUR -0.5874 -0.3711 -0.3560 -0.0608 0.1164 0.1641 0.1909 0.2173 0.2409 0.4124 0.4518 0.5725 0.6527

US stocks are, in general, negatively correlated to the Euro. The S&P 500 has a correlation of about 0.59. No sector shows positive correlation between price and the Euro. As the Euro declines, we should generally that US stocks should rise, all other things being equal. On a relative price basis, however, a quite different pattern emerges, as this table shows. As the Euro weakens, we should expect to see greater strength in the relative price of Information Technology. On the other hand, the relative prices of stocks in the Materials and Energy sectors are more likely to weaken as the Euro-USD exchange rate falls. This correlation covers the period from August 1988 until Wednesdays close and was calculated from daily data.

Copyright 2005 Wm E. Rhodes. All rights reserved. All information comes from sources believed to be reliable, but we cannot guarantee its accuracy. This is not an offer to buy or sell any securities. For private circulation only. At any time we or any of our employees may own or have a position, subject to change, in any securities or investments described herein. Unless otherwise stated, all views expressed herein (including estimates or forecasts) are solely those of Rhodes Analytics and subject to change without notice. This report does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive it. Remember that past performance is not necessarily a guide to future performance. One Washington Mall, 6th floor, Boston, Massachusetts 02108

Rhodes Analytics

Investment Strategy & Market Analysis for Professional Investors

Thursday, June 2, 2005 Notational ranking for overweight and underweight

range opinion value symbol Bullish strong overweight 5 4 overweight Neutral 3 neutral 2 underweight Bearish strong underweight 1

page 7

I, Wm E Rhodes, hereby certify that the views expressed in this research report accurately reflect the research models I have applied in this analysis. I certify that I have not received payment for specific research opinions or views expressed in this research report. Copyright 2005 Wm E. Rhodes. All rights reserved. All information comes from sources believed to be reliable, but we cannot guarantee its accuracy. This is not an offer to buy or sell any securities. For private circulation only. At any time we or any of our employees may own or have a position, subject to change, in any securities or investments described herein. Unless otherwise stated, all views expressed herein (including estimates or forecasts) are solely those of Rhodes Analytics and subject to change without notice. This report does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive it. Remember that past performance is not necessarily a guide to future performance. There are more disclaimers at http://www.rhodesanalytics.com/Disclaimers.htm

Copyright 2005 Wm E. Rhodes. All rights reserved. All information comes from sources believed to be reliable, but we cannot guarantee its accuracy. This is not an offer to buy or sell any securities. For private circulation only. At any time we or any of our employees may own or have a position, subject to change, in any securities or investments described herein. Unless otherwise stated, all views expressed herein (including estimates or forecasts) are solely those of Rhodes Analytics and subject to change without notice. This report does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive it. Remember that past performance is not necessarily a guide to future performance. One Washington Mall, 6th floor, Boston, Massachusetts 02108

Rhodes Analytics

Investment Strategy & Market Analysis for Professional Investors