The TSC Streetside Chat: Rich Bernstein of Merrill Lynch

Quantitative analysis -- analysis that relies on computer modeling to assess a variety of fundamental and technical factors -- is a relatively new game on Wall Street.

Only within the past decade or so has hardware gotten powerful enough to analyze the interrelationships that the quant wants to throw at them. What happens when the yield curve steepens, earnings accelerate and the price of oil heads south? It's a question your old Amiga would be hard-put to answer.

But being a good quant means more than keypunching data into your computer and seeing what comes out. A quant needs to know the workings of the financial markets inside and out, as well as have a strong-enough statistical sense to discard the old axioms when the data clearly do not back them up. Merrill Lynch's Rich Bernstein is Wall Street's top quant, ranking first in TheStreet.com's Analyst Rankings , as well as garnering the top spot in other polls.

This is not to say he's always right -- he has been wary on the stock market, and particularly the tech sector, since the summer of 1998. But Wall Street has forgiven him that, in part because some of his ideas have been so powerful. Take, for example, the notion that higher-quality assets outperform in periods of economic deceleration and that lower-quality assets outperform in periods of acceleration. It's so much a part of the investing vernacular you can almost forget it was once revolutionary.

Bernstein chatted with Associate Editor Justin Lahart, Staff Reporter David A. Gaffen, Assistant Managing Editor John J. Edwards III and Senior Editor Ellen Braitman.

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TSC: To begin with, could you explain how you approach quantitative analysis?

Rich Bernstein: There are many different types of quantitative groups. Each group on the Street is a little bit different from the others.

I think the way to think of our group is that we're really just another sort of investment strategy, portfolio strategy investment group, except we tend to use a lot more models, a lot more mathematical models, than our counterparts. We tend to be a little more disciplined, and rather than trying to come up with a theory and then find things to support that theory, we have a set of tools that we use, and we look at what those tools are saying and create the theory around those tools.

So it's a little more process-driven, probably, than what some of my counterparts do.

TSC: How does your group and the findings you come up with mesh with those of the other strategy groups at Merrill?

Rich Bernstein: Well, it's the beauty of Merrill that we're all allowed artistic freedom, within reason. The complaint has always been that Merrill will always be right, there's always somebody that's going to be right. I prefer to think that when we agree, at least we know it's genuine.

So, sometimes we agree, sometimes we don't. But I think you get more honest and original research that way, in that you're not constrained to a house view. Which is good.

TSC: You do have some constraints, whereas at Morgan Stanley, one of the many strategists may say, well, I think the Fed's going to tighten, and one economist there may say, well, I don't think it's going to happen. That doesn't seem to happen [at Merrill].

Rich Bernstein: Well, Merrill's got a very collegial atmosphere, and we may have opinions on what's going to happen, but we try very hard not to overstep our boundaries.

In other words, there is really just one Fed watcher for the firm and we defer to him, although we may disagree. We'll never write about those topics, we may talk informally, but we're not out to embarrass each other or step on each other's toes. But, within certain limits, there are certain things we prefer not to say. But in informal conversations, we express our opinions.

TSC: What's your take on the market these days?

Rich Bernstein: Well, I think it's kind of hard to define the market because people have very different views of what the market is. If you think of it in the traditional manner, which is the way I still do, the S&P 500 is your benchmark. And the S&P 500 really hasn't been doing very much for the past year. However, the majority of people these days, I think, look at Nasdaq as their proxy for the market.

So if you're saying 12 months forward what do we think is going to happen, we think the S&P probably still won't do very much, single-digit returns, plus or minus. And our guess is that the Nasdaq has a negative side in front of it. Magnitude's a little hard to determine simply because it's so volatile, and I'm not trying to make up a number here, but I think it's going to be pretty difficult to figure out what it's going to be. But the fact that it would have a negative side in front of it would probably shock most people.

TSC: And that's over the next 12 months?

Rich Bernstein: That's roughly a rolling 12-month period.

TSC: What puts you in a negative frame of mind about the Nasdaq going forward?

Rich Bernstein: Our story on the Nasdaq has been severalfold. One of our big themes, one we've had for quite some time, quite honestly looked wrong for a while then started to look right -- and who knows if it looks right or wrong [now], I guess it depends on the day -- was that the cost of capital in the technology sector was artificially low, that there were no barriers to entry, that anybody who had an idea was getting funded.

TSC: Through the equity...

Rich Bernstein: Through the equity market, yes. The question was going to be, what's going to happen as the cost of capital goes up in the tech sector?

And that's what started to happen. Everybody said that interest rates would have no effect on the tech sector. Although I don't have the data to prove this, my guess is that there are probably more bankruptcies in the technology sector than there are in any other sector right now. I think that's about the cost of capital, and the cost of capital coming home to roost.

So that's been our big story in tech; it's still our story in tech.

And the one thing that technology analysts don't like to discuss is competition. They all assume that the pie is going to grow big enough so that everybody can survive. The argument that people will make along those lines is that technology is going to become a larger part of GDP. I mean, unless you're an agrarian society that's tending vegetables, that's always been true, that technology always becomes a larger part of GDP through time. The only question is, how are you defining technology?

But the real issue is how we capitalize on those growth opportunities. We're not economists, we're investors, so we don't really care if it's going to be a larger part of GDP. We care about how we capitalize on those growth opportunities and what's going to be the rate of return on them. And that, for the past year now, -- 15, 16 months -- has been our big question about the tech sector."... my guess is that there are probably more bankruptcies in the technology sector than there are in any other sector right now."

TSC: With the cost of capital at an artificial low, we're starting to see that shake out now. What also holds back the Nasdaq and technology in the next year? Is it just the competition, or ...

Rich Bernstein: Well, that's a good question. Part of it's competition, obviously. But the other part is that what's going to cause that cost of capital to go up. One of our arguments has been that anything that squeezes disposable income will cause the cost of capital in the tech sector to go up.

The reason is that the household sector has been a very large supplier of capital to the technology sector in the U.S. And so anything that's going to squeeze their disposable income and going to force their standard of living to deteriorate will cause the cost of capital to go up.

The easy way to think about it is, for a while we were kind of jokingly saying that all the liquidity that was flowing into the stock market was beginning to flow into your gas tank. So rising oil prices and rising energy prices were two of the factors actually causing the cost of capital to go up.

Real wage growth has just turned negative for the first time in five years. What that says is that the standard of living for the U.S. consumer is starting to deteriorate for the first time since 1995. It's not like a bell goes off and everybody says, real wages are negative, but if they stay negative for a while and the standard of living does start deteriorating, what eventually comes up -- and I'll exaggerate a little bit here -- is the question, do I invest for the long term, or does Johnny get new sneakers. And the odds are that Johnny gets new sneakers.

People will do anything possible to keep up their standard of living. It means selling capital gains, which an economist would call disinvesting -- there's actually a term for it. So you can come up with all these different things that would cause the cost of capital to go up. But I think that's the big one.

TSC: [And] consumers are paying more of their disposable income in debt than they have in the past 12 months.

Rich Bernstein: Yes. That only compounds the situation. Higher debt levels mean they have a higher fixed cost. It's not like we're talking about people who have very strong balance sheets; we're talking about people who have weaker balance sheets. And the odds are they'll start with capital gains. As well as potentially demand higher wages, but that's another story.

TSC: You've spent a lot of time talking about the Not-So-Nifty 450, the bottom 450 stocks in the S&P 500. Do you still view that as a better place to go? Or has that changed at all?

Rich Bernstein: Well, in general terms the answer would be yes. That if you said, do I want to go to the Nifty Fifty or the Not-So-Nifty 450, my answer would be the Not-So-Nifty 450.

However, since we started that campaign, a lot of things have changed. The interest rate picture has changed quite dramatically. You know, there's a Truly-Not-Nifty 100 [the bottom 100 stocks in the S&P 500] -- I think if you really go off into extremes, there's probably a bunch of stocks out there that are really very attractive. What's more interesting than that is that the composition of that Nifty 50 has changed. It's now probably all technology.

TSC: There seems to be, or has been, an interesting little dyslexic kind of wave of divesting in the last few months. I'm curious as to what you think of it. It sort of vacillated ... let's put a little in tech and a little in growth and then meet some defensives and then maybe switch out of that into some cyclicals, depending on which way oil is going. But it's this weird sort of not really having one foot in either camp, based in all growth or all defensive. I'm referring to things like the drug stocks, basically, which have been really strong, and have then fallen.

Rich Bernstein: Actually, if you look at the drug group, and you look at the Nasdaq, it looks almost like a seesaw. When the Nasdaq goes down, the drug group goes up, when Nasdaq goes up, the drug group goes down, and that's a lot of your growthy momentum institutional guys just rotating back and forth and back and forth.

The drug group is one of the most-liquid groups in the consumer staples area. Most of the other guys are historically cheap and historically illiquid. Very often you'll hear from portfolio managers that there's no market cap to invest in the marketplace.

So what do they do? They quickly run to the companies that have market cap. And so if the Nasdaq's down today, my guess is that the drug index is up -- although I haven't looked at the market. They just roll into that because they don't know what else to do.

And then if the Nasdaq starts going up, they say, gee, we can't miss this. So they immediately roll out of their drugs and go into the Nasdaq. And day to day, you'll hear people talking about Phase 1, Phase 2, Phase 3; you'll hear people talking about a positive surprise in this company, a negative surprise in that company, but really, it's just these guys rolling back and forth, back and forth. There's really no material reason for it other than that they don't know what to do with the cash. And certain days it's actually quite dramatic, you can really see it."I don't think anything's priced into the tech sector except, you know, nirvana."

TSC: How long would you expect it to take for some of the effects on consumers you were talking about to start showing up in mutual fund inflows?

Rich Bernstein: That's a good question. In March and April, you started to see the beginning of that, where you actually, at one point, saw some outflows. I think you're seeing inflows again, but I don't follow that stuff regularly. Everybody expects this to happen really, really fast, and our story has been that the world actually moves a lot slower than people think these days.

We're talking about a multimonth, if not a multiquarter effect, before anybody really realizes what's going on. I actually think it started in March, and people don't even realize it's still an ongoing effect. One reason the market's having trouble recently is that the Nasdaq has come back, consumer confidence has popped up, retail sales have popped up, new home sales have popped up, everybody goes, Wait a minute. The Nasdaq can't have a prolonged rally, because of the effects this will have on the economy.

TSC: At the same time, we've also started to hear earnings warnings. Do you think those are already priced into the market now, going forward for the next few quarters?

Rich Bernstein: Certainly not for the tech sector. Not at all. I mean, I don't think anything's priced into the tech sector except, you know, nirvana.

These stocks are priced not only for superior growth, but a certainty of growth. That's where you get monstrous multiples. Whenever you see multiples of that magnitude on stocks of this size, they're priced for perfection.

There are always two things that go into a multiple: One is the growth rate and the other is certainty in the growth rate. And if you're getting these guys with 100-, 200-type multiples in both, there's no way to explain what's going on, other than both.

TSC: It seems like a lot of people still don't quite believe that a slowing economy affects tech.

Rich Bernstein: It's absolutely true. ... People have very short memories, and even in 1998, when the world was going into the global debacle, or the global deflation or whatever word you want to attach to it, technology stocks did very, very poorly. People don't seem to remember that.

They've forgotten all about it. And so clearly there's some economic sensitivity and, as I said, they're not priced that way at all.

TSC: On that note, does your forecast, since you see the Nasdaq being negative over the next 12 months, factor in one quarter of, say, very poor economic growth? I mean that's what happened in 1998, you'd have one quarter. On that note, does your forecast, since you see the Nasdaq being negative over the next 12 months, or at least 12 months from now, factor in some sort of, one quarter of say very poor economic growth, I mean that's what happened in 1998, you'd have one quarter.

Rich Bernstein: Right. Merrill Lynch's forecast is for economic growth to slow. Not that we're going to have a recession. I think that there may be one looming out there, but with 5% GDP, you've got a nice cushion, you've got 4, 3, 2, 1 before you get to 0.

So I think a recession is not imminent, that's much too dire. There are signs that the global economy is starting to crack under the pressure of concerted central bank tightening and $30-a-barrel oil. For instance, estimate revisions in the emerging markets are plummeting. Especially in the Asian emerging markets, they're plummeting to the point where people asked us did we have bad data?"If we're correct, and this is a bubble, people never believe that the bubble's over. They never believe it until everything's done, and gone."

It was just so dramatic. We checked the data, it was correct, and this month the revisions trends continued. They got even deeper and broader through the emerging markets. So that's where you would see the first crack; that's why we look at those markets so closely. You're not going to see the crack first in the U.S., you're not going to see it in Europe, you're going to see it in the marginal economies. And sure enough, you're seeing it in the marginal economies, and that's your early warning radar that's sitting out there, and it's cracked.

There's no doubt about it when the estimate revisions are dramatically negative in a very short period of time. Global growth is going to slow.

And I think you're also going to have some very tough comparisons. It's going to be very tough to keep up 50% growth rates when you don't have a big cyclical tailwind. And what the analysts have basically done, in my opinion, is assumed that these companies are not cyclical, and they're extrapolating the trend. That's what all cyclical analysts do when you're coming out of a trough. They always tend to extrapolate trends. It's just that now they're doing it on stocks that sell at 250 times earnings instead of 50, or 20 times earnings.

TSC: I find it interesting that people said is your data bad. What does that say going forward in terms of how people are prepared to...

Rich Bernstein: If we're correct, and this is a bubble, people never believe that the bubble's over. They never believe it until everything's done, and gone. Then they'll say, OK, maybe this really was a bubble. If you talk to most technology investors, they think that my argument about the cost of capital in the tech sector as a barrier to entry and all that kind of stuff is just amazingly wrong, and they just can't fathom what I'm saying.

You'd have to see me in a room with a bunch of technology people. It's actually quite funny, because they really look at me like, where did you come from? What are you all about? Talk about an unwillingness to think. Think about all of the people who have been classified as dinosaurs just for raising issues about whether this is this real or not? All of a sudden you're classified as a dinosaur. That's a classic sign of a bubble, a classic sign.

You go back and read about people who disagreed losing credibility and just being pushed aside. Think about all of the people on Wall Street who have lost credibility and how those who are the big tech proponents are thought of as heroes. And think of the notoriety that they've gotten -- very common in a bubble.

Now, I'm not saying that just because I've been antitech. But if you go back and read, you'll find that happens all the time.

TSC: The funny thing is that you probably use more technology personally, in your day-to-day life, than any[one on Wall Street].

Rich Bernstein: In fact, right now, I'm probably surrounded by fields of radiation. Yeah, that's probably true.

I think what a lot of these analysts have trouble with is that I'm not the type of person who argues with the demand side. I completely agree with everything these people say about what's going to happen to the Internet over the next five to 10 years, what's going to happen to wireless, what's going to happen to networking, to fiber optics. I actually agree with everything. But that's not the issue. The issue is not [whether these] are these good companies and good businesses, the issue is how are we as investors capitalizing on those growth opportunities? And are they good investments?

In fact, there comes a point where we finance them so well that we actually ruin the business for them. That's what happened in a lot of different areas where, if you had any idea, you came public. Think of networking. If you went back only about three or four years, you'd probably find that there were maybe two, maybe three, viable network companies.

Now you can probably get up to about nine. And all nine of those companies are supposed to grow their earnings, in the next five years, in excess of 30%. Now we know that's not going to happen -- all nine of these companies aren't going to do that. If they do, the nine's going to become 18. Why wouldn't everybody join in?

But yet the one word that analysts don't like to use is competition. You're really never going to hear among tech analysts the notion of competition.

My point is that there's no barrier to entry. You finance everybody, and everybody says there's no competition. And that's right out of business school -- an artificially low cost of capital leads to a fragmented market. Perfect. That's very normal.

TSC: What do you think of the idea that the bubble in the Internet sector, particularly, has already burst? Our own TheStreet.com Internet sector, which has peaked at 1150, is now down to 700, 800. Is that a bursting of the bubble or is the bubble getting smaller?

Rich Bernstein: I would say it's deflating. The bursting analogy always makes people think it's going to happen very quickly. In my mind, it's deflating, it's in the process of deflating.

But what's interesting is that if you talk to technology analysts in other industries, they'll say, oh, that's true of the Internet companies. It's not my industry, it's those companies. "You're really never going to hear among tech analysts the notion of competition."

TSC: Would you say though, for the Internet companies, that the cost of capital is no longer artificially low?

Rich Bernstein: Oh yeah. It's actually pretty well known, because you're finding a lot of them are going under because they can't raise capital. And the whole cash-burn issue has become front-page.

One of the things that I try to point out to analysts is that it's very easy to have a company that grows sales, especially if the Street is willing to finance you. And the example I always like to use is, I'm going to change auto dealerships in the U.S. I'm going to completely revolutionize the industry, and the way I'm going to do that is to sell you BMWs for $25.

Now if I do that, I'm going to gain tremendous market share. I mean, just monstrous market share. As long as the Street is willing to finance me, I can continue doing that. But obviously, the day the Street says no more cash...

TSC: Wouldn't you make it up on volume?

[Laughter]

Rich Bernstein: The day the Street stops financing me and says no more cash, I'm gone, I'm dead meat. And that's what we've just seen. I've exaggerated, obviously, to make a point, but that is essentially what we've just seen. That's a lot of what has gone on and there are actually business models that are not that far off from that.

TSC: You do a lot of work on low-quality companies and high-quality companies and low-quality companies that perform well, and vice-versa. Could you explain this a bit more?

Rich Bernstein: Let me start by saying that true high-quality companies in the U.S. are the cheapest they've ever been in the history of our data.

[But] high-quality technology is an oxymoron. There really aren't many true high-quality technology companies. There's a perception that they're high-quality, but again, getting back to the issue of how these price, not only for growth, but for the certainty of growth -- they really aren't [high-quality].

We use S&P common stock rankings to determine quality. And they're very objective -- they're done by computers at S&P, not by analysts, and they're based on the stability and growth in earnings over a 10-year period. And out of the 1,600 companies we use in our database, there are only two technology companies that get a rating of A plus. If you're curious, they're Hewlett-Packard (HWP Quote - Cramer on HWP - Stock Picks) and Pitney Bowes (PBI Quote - Cramer on PBI - Stock Picks). And Pitney Bowes -- everybody says that's not technology anymore. So if that's true, it's one company, Hewlett-Packard.

And so what's happened is that the technology bubble has spurred the performance of lower-quality companies. It's expanded the multiples on these lower-quality companies. Which is something that should never happen. You should always find higher multiples on higher-quality companies, because they're the safe havens. You should always pay a premium for the safety. There are people who have paid a premium to take risk. And that's very weird, I mean, why would you ever pay to take a risk? That doesn't make a lot of sense.

But that's just what we've seen.

TSC: Maybe you don't think it's risk...

Rich Bernstein: Well, if you don't think it's risk, that's right. That's exactly right. So what do people do when I get into this conversation, if I'm in a very growthy, technical audience? What do they do? They attack the S&P rating.

And they say, oh, what do they show? They're all based on history. And I try to say, well, they've always been based on history and they've always had a tremendous amount of information.But they'll attack the ratings.

So instead of believing the data and saying, well, that's kind of objective stuff, they attack the ratings. It's interesting to see that. So, what's very odd is, this has set up a really, really weird situation, because normally people will tell you that growth outperforms while profitability decelerates.

Now the question is, why does that happen? That usually happens because the growth-stock universe is dominated by higher-quality names. Why higher-quality names? Because they can [continue to grow], even though profitability is decelerating in the economy.

But what the bubble has done is put all kinds of low-quality names in the growth universe. So everybody's sitting here saying growth is going to outperform when profitability decelerates. But what's in the growth universe now is all cyclicals. What's in the value universe is all your high-quality names. So this mucks up a pretty standard theory on Wall Street, in that you could have value outperforming when the profit cycle decelerates, because all the high-quality names are now in the value universe.

So, when do low-quality stocks tend to outperform? They usually outperform when the profit cycle accelerates. That they did, but the problem was, the multiples were so high they were all in the growth-stock universe, they weren't in the value-stock universe, and that's really weird. Really, really weird.

The question right now for a lot of institutional people is do you make a bet on quality, or do you make a bet on style? Which do you believe? And that's what we tried to point out to people, that the quality consideration has always overwhelmed the style consideration.

What's interesting is that little bit I gave you on quality works in any macrocosm or microcosm in the market. You can do it within industries, you can do it within sectors, you can do it in the market, you can do them on countries.

So if we think the global profit cycle is going to decelerate right now, what are we doing? We're overweighting the U.S. and underweighting emerging markets. If you think an industry profit cycle is going to decelerate, you should always buy the highest-quality stocks in that industry. So if you think the technology-sector growth prospects are going to slow, you would want to buy the highest-quality stocks. There still remains the question of whether or not you want to be in technology. So on a relative basis, yes, higher-quality tech stocks would outperform lower-quality tech stocks, and we've seen that."There are people who have paid a premium to take risk. And that's very weird."

Notice when everybody thought technology was coming back to life it was the junky guys that took off? Whenever you think an industry is in a full phase, you never buy the high-quality stocks, you always buy the junk, because they have the greatest leverage into that situation.

TSC: In general, what sectors outside of technology do you think will perform best, or worst?

Rich Bernstein: Let me give you the two sectors we underweight first. One's obviously tech. And the second is consumer cyclicals. The Fed is not trying to stimulate the consumer. Anything that's going to stimulate the consumer the Fed will be tightening. The time you want to buy consumer cyclicals, retailers, those kinds of things, is when the Fed wants the consumer to spend. There are clear times when the Fed wants that to happen -- they're easing, you're getting tax cuts, boom, you buy every consumer cyclical you possibly can. That's clearly not what's going on now. You've seen the auto stocks perform poorly, the retailers, all that kind of stuff. And if you thought we were normally overretailed for this point in the cycle, this time we're like infinitely overretailed, because not only do you have all the bricks-and-mortar guys, but you have all of the dot-coms on top of that. So it's like an infinite number of retailers hanging around.

What do we like? In no specific order here, energy, we're still overweight in energy. Energy, to us, is the antithesis of the technology sector. In technology, you have an artificially low cost of capital, overinvestment. In the energy sector, you've had tremendous underinvestment. There are right now bottlenecks in almost every stage of production all along the way. OPEC countries are maxing out 100% of capacity, tanker companies -- I don't think there are enough tankers to move this stuff around the world -- refineries are at capacity, so refining margins are at the highest they've been in history, that type of stuff. Now obviously stocks don't react very positively as oil goes from $32 to $26 or $28 or wherever we are right now. But I think there may be a longer-term story there.

The caveat to that story is what does $30-a-barrel oil do to global growth? We've always called OPEC a pseudo-central bank, not in that they're trying to stimulate or slow the global economy, but their effect is almost like a pseudo-central bank.

When the global economy was very weak, oil was at $10 a barrel. It actually stimulated the economy. The economy is strong, it's at $30 a barrel, it slows down the economy.

We're overweight consumer staples. There are lots of different ways you can look at consumer staples. They're not as much of a high-quality universe as they used to be, but 17% of our A plus universe is consumer staples.

You do have some M&A activity going on in the foods; you've got pretty good order patterns in some of the beverages guys and things like that, as well. And they're traditionally very stable companies. And everybody, when you do that, they say, well, what about a company that, all these companies that just reported they're being squeezed by commodity prices. And that's very standard. You have to realize that consumer staples are notoriously bad late-cycle stocks.

The one caveat in consumer staples: You want to be wary of the drug group. It's not a Phase 1, Phase 2, Phase 3 story, which every analyst focuses on, but it's Washington. You just had the reimportation of drugs pass the Senate, I believe, and a lot of questions about prescription drug prices and those kinds of things -- it's a very hot political issue and has the potential to knock the stuffing out of the stocks on any given day. After Labor Day, you have to watch that issue very, very closely, especially if it's a tight race between Gore and Bush.

We're overweight in what we call high-quality financials. About 33% of the A plus universe is financial stock. It's the largest group in the A plus universe. We've got some high-quality insurers, high-quality credit-card companies, those type of things in there.

Now the one issue for financials that you have to be aware of is that the time to really load up on them has historically been when the Fed is easing or the [yield] curve is steepening. When that happens, you want to buy every financial stock and its brother, and the junkier the better. The Fed isn't easing and the yield curve isn't steepening, so what does that mean? Well, regional banks get about 65% to 75% of their revenues from spread product. With the yield curve the way it is now, there aren't a lot of revenue prospects there.

You've got credit quality starting to come under question more and more, so I think you want to be a little careful and play the financial sector as a barbell where you're really overweighting these high-quality guys, and avoiding the low-quality guys at all costs.

We're overweight REITS. Again, sort of a defensive play. The one issue on REITS you need to be careful of is that the REITS are always hostage to their tenants. We're not really big fans of retailing, so I think you want to stay away from mall REITS and strip mall REITS and retail REITS in general. We're not big fans of technology, so I think you want to be very wary of the Silicon Valley REITS, some of which have been quite hot, but I think you'd want to be a little wary of them.

One of the problems in what I just said, however, is that a lot of the REITS have experienced a lot of their growth in California. So it's easy to say stay away from the Silicon Valley REITS, but it's actually much harder to do than that.

And we're overweight in utilities, as well. And just about everything I didn't mention we're about neutral weight.

TSC: I think that wraps it up.

Rich Bernstein: Cool.

TSC: Thanks a lot.