You and your clients have probably gone on the defensive after this past autumn’s historic market crash and the unfolding global credit and business crises.

So, where better to look for guidance than to the man who all but invented investment analysis and defensive investing in a similar era? He is, of course, Benjamin Graham, who invested in the good times (the 1920s) and the bad times (the 1930s).

In The Intelligent Investor, a book first published in 1949 and revised several times since, Graham laid out a set of criteria that stocks must meet in order to be considered defensive.

The bad news is that U.S. large-capitalization stocks fail to meet the criteria today, as a survey of the 30 stocks in the Dow Jones industrial average indicates.

This suggests that the time to step back into the stock market has not yet arrived. A sufficient margin of safety is not available because prices have not adjusted to values. In fact, whatever those values turn out to be in this investment world have suddenly been turned upside down.

A defensive stock, according to Graham, has these characteristics:

> large capitalization

> dividend payments each year, for at least the past 20 years

> earnings for each of the past 10 years

> average earnings for the latest three years that are at least one-third higher than three-year average earnings at the beginning of the 10-year period

> a price/earnings multiple of 15 or less

> a current ratio of two to one (that is, current assets at least twice current liabilities)

> working capital greater than long-term debt

> a share price that is trading at no more than 1.5 times tangible book value. But if the P/E is less than 15, a higher price/book value ratio is permissible.

This is a stiff set of requirements and, these days, few stocks even approach the list’s threshold. In fact, none of the stocks on the DJIA pass all Graham’s tests.

Among the DJIA companies, it is easy to match the first few items. Only Intel Corp. fails the dividend history test; Coca-Cola Co. and McDonald’s Co. are excluded because they trade at more than 15 times earnings.

When it comes to financial strength, however, as indicated by the current ratio (current assets to current liabilities), most stocks fail Graham’s test. Only two companies have the necessary 2:1 ratio: Intel and Pfizer Inc.

Scoring is better when comparing working capital to long-term debt. Five companies on the DJIA — Chevron Corp., ExxonMobil Corp., Intel, Johnson & Johnson and Pfizer — have more working capital than debt. Note in the accompanying table how current liabilities actually exceed current assets for so many companies.

Note also that Graham avoided the widely used debt/equity ratio as a measure of financial strength.

Mind you, companies manage their short-term financial needs differently than they did 50 years ago. Inventories are kept lean by just-in-time deliveries and companies are unafraid to operate with a working-capital deficit. So, this requirement may have less validity today, although this recession might yet kill such an assumption.

The working capital ratio is no help in analyzing banks and financial institutions, as their balance sheets lack current assets and current liabilities; everything they have and owe is working capital. The DJIA includes three banks — embattled Bank of America Corp., endangered Citigroup Inc. and the relatively unscathed JPMorgan Chase & Co. — as well as credit card issuer American Express Co.

When it comes to valuations based on tangible book value, most DJIA companies fail Graham’s test again. But the beaten-down bank and financial services stocks appear cheap when measured by price/tangible book value (see table).

Graham believed that a stock was attractive if it traded at no more than 50% above tangible book value per share. On that basis, there are some candidates among the DJIA companies: money-losing Alcoa Inc. and the banks — BofA, Citigroup and JPMorgan Chase.

Remember Graham’s qualification, though: if a stock trades below 15 times earnings, a higher price/book value ratio is justified. His pertinent formula is P/E multiplied by price/book value. Any result less than 22.5 qualifies as a “moderate ratio of price to assets.”

Going through this exercise produces three more names: American Express, Caterpillar Inc. and Chevron.

On individual measurements, some DJIA stocks have appeal. The integrated oil giants ExxonMobil and Chevron are among these, as are medical-products maker Johnson & Johnson and pharmaceutical producer Pfizer. However, Pfizer’s appeal may suffer if its proposed merger with Wyeth goes through.

@page_break@Whatever attraction the financial services group displays in these valuations must be tempered by the risk of further asset impairment in the industry.

There are times when even basic, conservative investment analysis is not enough to cut risk. IE