Flashing yellow lights mean slow down, but there are no such signals on Wall Street right now. Not only that, the red light has gone the way of the rotary phone.

The name of the game now is to snap up the next hot stock that supposedly can double or triple in value. Defense is practically out the window — it is all about offense in a rampaging market that shows no signs of abating.

That’s not the mind-set, however, of one of the brighter market minds around, Raymond James Financial’s chief investment strategist, Jeffrey Saut, who says that a more defensive strategy is called for. His rationale is spelled out in a commentary he fired off to clients Monday.

One of his concerns is market valuation. He notes, for example, that when you look at the S&P 500, history shows that stocks in aggregate are optimistically priced at 18.5 times trailing four-quarter earnings and 3.4 times book value, yet sport a paltry 1.8% dividend yield.

Another worry pinpointed by Mr. Saut is rising inflation, which, he notes, was confirmed by a new all-time high in the Goldman Sachs Commodity Index last week. Pointing to a series of hefty year-over-year price increases, such as corn (38.5%), soybeans (45.5%), wheat (74.4%), milk (121.8%), and eggs (167%), he argues that it’s merely a matter of time before these sort of price increases bleed over into prices at the supermarket. “I think you’re going to see this increasingly reflected in the fourth quarter of 2007 and continuing for the foreseeable future,” he writes.

Barring a severe economic slowdown, Mr. Saut concludes that higher inflation implies higher interest rates. In fact, he thinks the surprise in 2007 could be that instead of lowering interest rates, the Fed keeps them where they are, or even raises them.

Another worry is the numerous misses in second-quarter earnings numbers, combined with a plethora of corporate reductions in forward earnings guidance.

Given his concerns, our worrywart is leaning toward what he regards as fairly defensive stocks, preferably those with yields. In this context, he favors such names as Johnson & Johnson, Mead-Wesvaco, Flagstar Bancorp, Quadra Realty, and Wachovia. He also likes a number of exchange-traded funds, such as PS Aerospace & Defense, PS Water Resources, and a relatively new water-based ETF, PS Global Water Portfolio, which includes a number of global names.

Meanwhile, one of the world’s most successful investors, Warren Buffett, is on record with the observation that stocks (in the aggregate) will provide substandard returns over the next few years. At the moment, the market, judging from its ongoing buying frenzy, is suggesting the Oracle of Omaha is passé.

Given this oracle’s record, the market may well be wearing blinders.

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DOW POWER “I inherited $230,000 and I decided to put $50,000 of it into just one stock,” Murray Korman, a 57-year-old electrician, told me via e-mail the other day. “I want to be ultra-conservative and invest the money it in a quality name, like one of the Dow Industrials. Which one would you pick?”

For starters, I don’t agree with your idea of investing $50,000 in just one stock, but if that’s your choice, so be it.

For some thoughts, I rang up a leading tracker of the 30 Dow stocks, a fellow who has written a book about them (“Winning with the Dow’s Losers”). He’s Chuck Carlson, a contributing editor to the Dow Theory Forecasts newsletter in Hammond, Ind.

He has three favorites among the Dow stocks, which in their entirety represent an estimated 30% of the market capitalization of the New York Stock Exchange. These stocks are IBM, McDonald’s, and Hewlett-Packard.

His no. 1 selection is IBM, largely because of its pick-up in earnings and revenue growth and its transition to higher margin businesses, namely software and technical services. Over the next five years, Mr. Carlson pegs the company’s annual revenue and earnings growth at 7% to 9% and 10% to 15%, respectively.

In the case of McDonald’s, the fast food giant continues to rack up strong same-store sales. Mr. Carlson is also impressed with the company’s focus on driving profitability, rather than in growing its number of outlets. Looking five years out, he sees annual profit growth of 12% to 16% on yearly revenue gains of 6% to 8%.

Hewlett-Packard wins his endorsement for expanding its global share of the PC business to about 20%, and doing a good job of maximizing profits across the portfolio, including printers, software, and technology consulting services. He expects company earnings to grow 12% to 15% a year over the next five years on annual revenue increases of 6% to 8%.

Mr. Carlson figures each of his three Dow picks can generate market appreciation of 13% to 15% over the next 12 months.

His second-tier Dow favorites are American Express, Intel, Johnson & Johnson , and ExxonMobil. By the same token, he views a number of the Dow stocks as pricey, notably Altria, Home Depot, AT&T, Pfizer, and General Motors.

dandordan@aol.com