THE RHODES REPORT CAPITAL MARKET COMMENTARY MONDAY SEPTEMBER 17, 2012 FORECAST ! WORLD MARKETS ARE ON THE DEFENSIVE THIS

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1 T R Telephone: richard@rhodes-capital.com Web Address: MEPTEMBER 212 -Yr / 1-YR Twist Yield (Weekly) Doesn t Seem to be Working -yr. vs. 1-yr. Note SPREAD WMA WMA Operation Twist is the selling of short-term notes and buying of long-term notes/bonds. This should flatten or narrow the yield spreads, but that isn t happening, and certainly last week s as well as the previous week s trade have cooperated. We ll wonder aloud about unintended consequences. FORECAST STOCKS: The European debt contagion has been kicked down the road a bit further as Spanish and Italian short-and-long term bond yields have moderated recently given the ECB plan to buy bonds of up to 3-years in maturity...but only if asked; and only if conditionality is imposed upon those asking. This has supported stocks in the short-term, but won t solve the overriding debt and fiscal problems. So enjoy it while it lasts; it s now it is in the polititian s hands and that scares the bejebes out of us. STRATEGY: The S&P remains above long-term support at the 16- wma at 1226; which delineates bull/bear markets. However, the 2-dma support level at 1349 remains the bulls Maginot Line. We ve noted this is perhaps one of the weirdest rallies we ve ever seen, and it causes us a great deal of consternation. A potential selling inflection point is at hand remain intact. And there are reasons to believe that the highs have not been seen just yet. As for overnight news, the Financial Times has run an article stating the Fed s QE-3 move to lower mortgage rates will be blunted by the fact banks don t have the personnel in place to process the business. The Fed will be buying up 7% of the total mortgage-back securities market; and this could be a rather unwanted problem since the law of diminishing returns on subsequent QE moves is anticipated. Also, we find Spain s Finance Minister laying out that Spain has done quite enough on the cutting of its public spending. It remains to be seen whether the bond market vigilantes return to Spain once again as they did in previ- CAPITAL MARKET COMMENTARY! WORLD MARKETS ARE ON T DEFENSIVE THIS MORNING with European bourses modestly lower; Japan s NIKKEI trading sharply higher, while China s SHANGHAI index trading sharply lower. There is no rhyme or reason for what we are seeing this morning other than the digestion of last week s move by the Fed to buy mortgage-backed securities and extend Operation Twist and ZIRP. Quite simply, the markets have gotten a bit too far ahead of themselves, and indeed they are due for a breather to bring prices back to neutrality. We do not know at this point whether it shall be a garden variety correction or whether it shall be some more of a larger inflection point we are open to both possibilities. We d not be surprised to see the S&P trade downwards to support between 143-to-14; but certainly not any lower than that if the bull market is to RCM T OVERNIGHT PRICES Quotes at: 7:3am EST INDEX Morning Futures LAST 1 M DAILY CHG S&P down 1, Nasdaq 1 down 2, year Note Yield up 1.84% -3.2 bps Crude Oil down $ $ (.29) Euro down Yen down Gold down $ 1,772.2 $ (.) Foreign Indices CHG % YTD YTD % FTSE 1 Index down, % % German DAX down 7, % 1, % French CAC down 3, % % Japan Nikkei 22 up 9, % % SSE China Composite down 2, % % Spain Madrid General down % % Italy FTSE MIB down 16, % 1, % US Indices Dow Industrials up 13, % 1, % Nasdaq 1 up 3,184..% % S&P Large-Cap up 1, % % S&P 4 Mid-Cap up 1,27..% % S&P 6 Small-Cap up 486..% % 212

2 CAPITAL MARKET COMMENTARY ous episodes of Spain s bond yields falling and her politicians then becoming a bit obstinate. Certainly they have returned this morning as Spain s 1-year note is at.93%...up 1 bps. This is a flash point we should all be focused upon given Spain s history of dealing with the troika and falling and then rising interest rates. Lastly, the NY Empire State Manufacturing Survey was released this morning, and it hit a two year low in September to -1 from -. This was a surprise to economists who expected a rise to. US Dollar Index (Weekly) On a Slippery Slope to New Lows?? The USD has begun to fall precipitously; and it has broken trendline and 6-WWMA support levels. The probability a move to new lows is underway is VERY HIGH. Will this push foeigners out of US traesuries? Price Oscillator (-2.418) US DOLLAR INDEX Continuous 6-WWMA P being long bond yields via the Lehman 2+year bond 2x short ETF (TBT).! TRADING STRATEGY: At this point, we are modestly net short as we look for a correction to develop in which we can gauge whether we are near an inflection point or merely a garden variety correction. We can make each case, but we can perhaps make the garden variety correction case a bit more strong given various inter-market relationships such as the falling USD and rising rates We are short via the Russell 2 2x short ETF (TWM), and we are down by mere pennies in it. If we don t see weakness soon, then we ll simply hove to the sidelines in a risk management move. And if we are to be long, then we want to be long various energy shares of which we ll share tomorrow with several being those that we have been long in the past. Lastly, we ll wait for gold shares to correct before buying back into the group; they are far overextended, and the risk-reward of being long here is not very good.! OPERATION TWIST: Over the past several weeks, we ve seen the spread between the -year and 1-year note widen out. This isn t to be so, for the Fed is attempting to hold down longer-term rates, but in fact we ve seen several breakouts on a daily and weekly basis of the 1- year notes and 3-year bonds. At this point, it may not be considered troublesome as it may feed the stock market tiger; but if in fact sharply higher yields are ahead then it shall blunt the stock market tiger. In this regard we turn to the US dollar index week chart, which has broken down rather markedly. If foreigners shun the USD, and they shun US debt then we must be cognizant of the speed at which interest rates move higher. Hence, we are interested in RCM T 2 M 212

3 PORTFOLIO: RHODES AGGRESSIVE DISCRETIONARY No.! Trade Date Long/ Short Share No. Name Ticker Beta Port % Invest Entry Price Current Price Unrealized P/L Percent P/L Stop Loss Point 1 9/1/212 L 643 China ETF FXI.9 1.4% $ 21,344 $ 33.2 $ 3.19 $ 1,283 6.% $ 33.2 TRADE < $ 41. N/A 2 9/12/212 L 1,6 Natural Gas ETF UNG.4 9.7% $ 21,389 $ 2.2 $ $ (36) -1.4% $ 18. TRADE < $ 3. N/A 3 9/14/212 L 2,13 Russell 2 2x Short TWM (.8) 24.8% $ 4,782 $ 2.66 $ 2.34 $ (683) -1.2% $ - TRADE < 4 N/A.% $ - $ - $ - $ -.% $ - N/A.% $ - $ - $ - $ -.% $ - 6 N/A.% $ - $ - $ - $ -.% $ - 7 N/A.% $ - $ - $ - $ -.% $ - 8 N/A.% $ - $ - $ - $ -.% $ - 9 N/A.% $ - $ - $ - $ -.% $ - 1 N/A.% $ - $ - $ - $ -.% $ - 11 N/A.% $ - $ - $ - $ -.% $ - 12 N/A.% $ - $ - $ - $ -.% $ - TOTAL (.4) 44.8% $ 97,1 $ 293 "<" Denotes Change Model Portfolio Inception ($1k): January 1, RECAP Starting Balance $ 244,41 2 Performance: +2.34% Closed Positions $ (26,93) 26 Performance: +47.7% Open Positions $ Performance: +2.84% Dividends $ Performance: -3.7% PORTFOLIO YTD (Gain/Loss) $ 218,436 $ (26,1) -1.64% 29 Performance: +7.4% S&P YTD 16.% 21 Performance: +1.22% Over/(Under) Performance % 211 Performance: -.8% TARGET Earnings Release TRADE PRICE NOTE: All entry and exit prices for stocks are the average of the high and low prices for the trading day as provided for byyahoo! s website at DISCLAIMER: "The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' securities, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. The illustrations and charts in this report are educational only and do not take into consideration your personal circumstances or other factors that may be important in making investment decisions. This report is not a recommendation to buy or sell a particular security. Trade Orders: Trade Executions: 1. None. 1. Newmont Mining (NEM) exited long positon on the opening at $ Goldcorp (GG) exited long positon on the opening at $ Gold Miners Juniors (GDXJ) exited long positon on the opening at $ Russell 2 Small Caps 2x Short (TWM) bought a 2% long position on the opening at $2.66. The Rhodes Report is published by Rhodes Capital Management, Inc. Mailing address: 111 Presidential Blvd. Suite 13; Bala Cynwyd, Pennsylvania 194. All contents copyright Rhodes Capital Management, Inc. Reproduction, retransmission or redistribution in any form is illegal and strictly forbidden, as is regular dissemination of specific forecasts and strategies. Otherwise, feel free to quote, cite or review if full credit is given. The Rhodes Report is published daily, including special reports as market conditions warrant. Correspondence is welcome, but volume of often precludes a reply. Subscription rates are: $279/ annually or $19/six-months. Visa, MasterCard and American Express accepted. Delivery is available via Internet download and . This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. The report is published for informational purposes and is not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without any notice and The Rhodes Report is not under any obligation to update or keep current the information contained herein. Past performance is not necessarily indicative of future results. The Rhodes Report accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. RCM T 3 M 212

4 S&P INDEX/ BROAD MKT INDICATORS Overhead resistance is rather strong, and proved its resistance yesterday. A break of the recent lows at 143 would suggest lower prices. S&P INDEX 18-DMA DMA 6-DEMA DEMA day 11 Model 11-4-day Model % Above - 1-DMA Possible divergence Sideways topping Overbought - - % Above 2-DMA -dma/1-dma -DMA resistance was regained in bullish fashion 1-DMA Intermediate-Term Model Topping 1-DMA Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov S&P TECHNICAL COMMENTS # OVERAD TRENDLINE RESISTANCE WAS POKED FOR T PAST TWO TRADING SESSION IN A EUPHORIC TRADE: The question now becomes whether prices can extend higher and render resistance to the dust bin of breakout levels. The S&P has now reached into our upside resistance zone between 14-to-147 zone. In our opinion, we don t believe sufficient demand is available to push prices through this zone without having a correction first given the short-term overbought conditions. This, coupled with the complacency and sell the news type trading environment should allow for a test of lower support levels. Then and there we shall find out whether support holds and argues for higher highs; or whether it is given and a major inflection point has been seen. RCM T TECHNICAL INDICATOR REVIEW: $ The 2-day is rising; but the 4-day model is trading lower in bearish fashion. $ The % of stocks above their 1-day moving average is at overbought levels. $ The % of stocks above their 2-day moving average stands at 74%...flat from the prior day s close. The 1-dma has been regained; and we must view this as positive for now. $ The Intermediate-term Model remains higher in bullish fashion; but is showing signs of topping out. With the 4-day model lower, then a turn lower would confirm a larger correction is underway. 4 M 212

5 MODEL PORTFOLIO POSITIONS I China ETF FXI TRADE Natural Gas ETF EXIT LONG Last: $ 3.19 TGT: $ 41. Entr y: $ 33.2 STP: $ 33.2 UNG Last: $ TGT: $ 3. Entr y: $ 2.2 STP: $ 18. TRADE EXIT LONG 4-day BLI 4-day BLI day BLI (-.8744) 14-day BLI (2.238) DMA FTSE China 2 Recent support has held, and we can view this pattern as a bullish falling wedge; a -dma breakout would confirm higher prices. 28-DMA ep Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Two higher lows coupled with the bottoming 1- dma suggest 2 thigher the trend has changed to higher. Look for a breakout and sharp 1 move higher. 3-DMA US Natural Gas Fund 1-DMA ep Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Russell 2 2x Sh TWM Last: $ 2.34 TGT: $ - Entr y: $ 2.66 STP: $ - N/A Last: $ - TGT: $ - Entr y: $ - STP: $ - 4-day BLI ( ) day BLI (-7.314) UltraShort RUSSELL 2 ETF DEMA DMA The bullish wedge forming suggests 2 higher prices ahead. A 2-day model turn higher would confirm. Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov 3 2 RCM T M 212

6 The Blue-Line Indicator or BLI Explained The BLI is our simple momentum oscillator used for timing and trend decisions; we rarely if ever use other momentum indicators for we prefer to focus and understand one indicator really well rather than a basket of indicators that can at times be contradictory. Furthermore, we prefer to use the BLI in conjunction with basic chart patterns; it is our experience that this combination works rather well for type of trading style. Basically, the BLI it is a full stochastic indicator derivative of our own undertaking; our changes have been several, but primarily relate to smoothing the indicator in order to provide for better signals once it does in fact change directions. We use varying time periods dependent upon whether we are working with weekly or daily charts. We have found that a 14- period BLI works well with the weekly charts, whereas both a 2-period and 4-period work well with daily charts. Obviously, the 4-period BLI catches longer and more tidal changes in direction. We normally don t use these in our Daily Bulletin given its shorter-term time frame, but behind the scenes it plays a big part. When using the BLI with price charts; we look upon the following 3-factors as set-ups upon which the probability is highest to trade: 1. BLI Extremes: Oversold (-6 to -8)/Overbought (+6 to +8) When the BLI trades into either extreme, our reversal ears go up as a change in trend becomes a higher probability. This puts the risk/reward dynamic in our favor generally, but we won t take a position without well defined stop losses and perhaps prices are trading into support or resistance as the case may be. However, we must note that extreme conditions can and will become more extreme in a powerfully trending market; hence this is the caveat to trading with the BLI in isolation. 2. BLI Divergences: Positive/Negative A divergence is said to have occurred when the price and BLI do not make new lows/highs together. They in effect diverge, with the BLI not confirming the prevailing trend. If the BLI turns higher/lower from below a previous BLI low/high then a divergence is said to have occurred, of which the probability is increased that the trend is changing in favor of the BLI direction. 3. BLI Reversals from Positive/Negative Levels Another very good BLI trading pattern which denotes a strongly stock is when the BLI turn higher from already positive levels this suggests a strong upwards acceleration is underway. Conversely, a turn lower from already negative numbers suggests a strong downward acceleration is underway. RCM T 6 M 212