Saturday, February 04, 2006

My caution flags are up.

Though I will continue to post the usual stuff re: oil, personally my caution flags are up and though I will let the energy and oil service run, I am also letting cash build right now. These are my thoughts:

- The way energy stocks and oil service raced up in January, while profitable, makes me nervous, particularly since gold came along for the ride.

- I watched Jim Cramer's MadMoney show from Harvard and the first thought that came to my head was "Market Top". These are in theory America's best and brightest, with amazing futures ahead of them, entranced to a cult-like state by, as Mark Haines of CNBC accurately calls him, "Reverend Jim of the Church of What's Working Now" and his traveling show, which is admittedly entertaining. [Note that I don't mean to criticize Jim Cramer personally; he has a style that works for him and he is a smart guy, but I think of the show as more entertainment and market weather show than anything else.]

- I have noticed some very speculative stocks just skyrocketing.

- Some messy stuff is on the horizon: Iran, the Fed head transition, what the yield curve suggests, the possible ramifications as the housing boom slows, the slow burn of high energy prices.

- Finally, three smart investors have similar ideas about caution and/or cash: Jim Rogers, Peter Thiel (article to come..), and in this weekend's Barron's, Jeremy Grantham.

Barron's: An Asset-Class Act.


Barron's: Who is Hyman Minsky and why are you quoting him in your latest letter to clients?

Grantham: He was a serious economist. His thesis of stability being unstable was not at all mainstream. In fact, he had the good sense to keep writing and rewriting the point for 20 years. There is ironclad logic involved. If you have a wonderful stable world and, better yet, it is growing nicely and nothing is going wrong, you are likely as the years go by to take more risk and more risk and more risk, and the cost of taking it gets less and less because interest rates come down, and you can imagine that people will get carried away into thinking such conditions are permanent and take on record levels of debt. They think conditions will always be safe, they will always be good. And then all it takes is some small event to create instability.


Where are you funneling money to?

Cash -- plus anything that can do a little bit better than cash.

Which would be?

Conservative hedge funds.