It doesn’t matter what happened on Capitol Hill this week. What does matter is having a plan to get for getting past not just the next several days of ups and downs in the market but the coming year as well.

 

A bailout program, despite the fanfare, won’t be a panacea. The credit markets are burdened by trillions of dollars’ worth of muck buried around the world. And it’s more than just subprime mortgages; there’s trouble in all asset classes.

 

Governments won’t be able to suck it all up. Rather, markets will have to work through years of poor banking and risk management practices, with the result that companies and consumers--even the best of borrowers--won’t have access to as much credit as they once did.

 

We have to deal with a stock market that has to assume businesses are less likely to grow revenues. Stock prices aren’t likely to rise in the absence of specific, realistic catalysts.

 

The current bear market didn’t materialize over the past few weeks, and it won’t go away anytime soon. However, that doesn’t mean you’re sunk. You’re seeing lower prices on plenty of your stocks, bonds and funds. But it’s not time to dump and flee. The worst course you can take is to try to time broad up- or downturns in the markets.

 

Instead, go through your own portfolio and make sure that each investment has solid value that will carry it through a difficult market. And I’m going to continue to do my best to help you figure this out.

 

First, we have to have a plan. For me it comes down to four basic points.

 

Now isn’t the time to be optimistic that something is going to drive our stock prices higher. While many specific cases may indeed reasonably work out, you have to come to a rational conclusion whether each stock you own justifies your continuing investment. I’ve broken this process into a four-point test and run each of my Personal Finance recommendations through it.

 

The first step is to evaluate the business risk to the company. Focus on reasonable assumptions in light of a slowing economy. Will the company continue to generate steady revenue flows and, more importantly, profits?

 

We need to look at the industry and markets in which the company operates. If it focuses on products and services that are crucial for its customers--energy, basic services--the prospect that its business will continue even if the economy sinks is more certain.

 

On the other hand, if the company operates in an industry that relies on more discretionary consumption--luxury goods, for example--the chances of it making it through without stumbling decrease.

 

Prime examples of companies that, by their nature, are more likely to make it include major utilities such as Southern Company (NYSE: SO). The power producer and distributor has ample regulated utility customers, who continue to contract for profit-margin-assured electric power. A slowdown will impact growth and expansion, but it won’t cause a massive drop in power consumption.

 

Another example comes from the petrol business, Linn Energy (NSDQ: LINE). This natural gas and crude oil producer has a broad base of properties that account for many years of proven reserves. More importantly, Linn’s cost of production is lower than many of its peers’, so even if gas and oil prices head lower, revenues and profits will still flow.

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The second part of the plan to evaluate companies goes beyond business operations, to financial stability and sustainability. As we’ve seen before and will see again, good companies with good productive assets in good markets can run into major troubles if they can’t get and maintain access to the lifeblood of the markets--credit.

 

Getting to know a company’s balance sheet is crucial to understanding whether it can make it across troubled waters or if it’s a sitting duck.

 

Start with credit facilities and debts. Revolving credit lines allow the company to pull down shorter-term cash as necessary for near-term liquidity needs. Then take a look at term debt from either individual banks or syndicated banking groups. Next, determine whether the company has any notes or bonds in the market and when they’re coming due.

 

Rolling over debt is getting harder, but it is getting done. Banks and bond buyers are looking at the same things we are--primarily the sustainability of the underlying business, step one in our evaluation process. Businesses with constant, heavy cash coming in bring a lot of credibility to the table when renewing or rolling over debt.

 

Certain industries’ cash flows are easier to understand than others’. But major regulated utilities, energy partnerships and federal contractors such as defense manufacturers have pretty transparent businesses.

 

The third step in our evaluation is evaluating the market risk to the stock, not just the company. Market risk includes trading activity; this involves taking a look at short interest in the shares as well as the susceptibility of it and/or its peers in the market to major selloffs. This hasn’t provided much insight over the past few months, as most stocks been subject to heavy selling or, at least, higher volatility.

 

In constructing your portfolio, you need to determine how much volatility you can accept. You don’t want to subject yourself to an investment with trading activity that’ll give you more insomnia.

The fourth part of the plan has always been a cornerstone for me: Does the stock and the company behind it pay its shareholders a fair cut of revenues and profits? The answer to this question is particularly crucial right now.

 

If the market isn’t providing much recognition, and the economy, even for the best companies, isn’t generally conducive to growing businesses, it’s even more important to buy and own heavy-cash-generating companies that pay big dividends. Cash coming in buys your patience. If a company is paying you a steady and heavy dividend, you can endure more volatility and even lower stock prices.

 

One major market that continues to pay very well is bonds. Bonds are what have worked, not just for weeks or months but for years, during everything that has and can come our way. My favorite bond funds and individual mini-bonds have been and will be volatile, but over time they come through with steady cash and principal that grows over the years.

 

That doesn’t mean some of my bond picks, including my favorite closed-end funds recommended in PF and The Yield Letter, won’t have gut-wrenching ups and downs.

 

Over the past several years, I’ve experienced big moves in both directions, but over time my core funds have kept paying and have worked out. One of the best for me for close to 15 years has been PIMCO Strategic Global Government (NYSE: RCS). Its dividend has been consistent, and it’s now yielding nearly 8 percent.

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The fund has endured plenty of global credit crises, including those in the 1990s, and it’s generated a total return of 187 percent during the last decade, an average annual return of more than 7.5 percent.

 

The stock price has suffered, with losses as steep as 20 percent in April 2004, 15 percent in December 2005 and 18 percent last spring. Those numbers make last month’s 5 percent slip seem trivial. And in the big picture it is. The fund is up more than 10 percent this year.

 

There’s a key difference between bonds and stocks: During market messes, all you need from bonds--inside or outside a fund--is that they stick around. We simply need them to keep paying our interest and principal. We don’t need growth; we don’t need to worry about dividends. All we need to know is that the governments and corporations are going to make it through any market or economic mess. The rest is easy.

 

We just keep buying and owning, and the cash keeps coming.

 

Still Trying

 

I can always do better. It’s easy to look back with genius eyes and identify countless stocks I could have or should have told you to buy or sell over the years. But I didn’t.

 

And I’m pretty damn sure there will be more could have/should have situations as the weeks, months and quarters keep rolling on the odometer of life.

 

At the same time, not all my calls have been lame-brained. This one may be among the best: Spend a couple bucks cruising out of the easy-to-get-to Port of Miami with like-minded folks who managed to make a little on their own portfolios, all the inevitable couldas and shoudas notwithstanding.

 

I know two guys are coming--Elliott Gue and Roger Conrad.

 

We’ll talk about out what investments will help our portfolios grow while enjoying warm waters from Miami, on to island stops including St. Barthelemy, through the Panama Canal and finally to Costa Rica.

 

Click here for details.

 

Dead Guys of the Week

 

With a name like Steinway, you had a bit of a reputation to uphold while growing up. Such was the case with Henry Steinway, the great-grandson of the founding patriarch of Steinway & Sons.

 

Henry’s dead now, at 93 years, but let’s set that aside. Many of you know I play the piano. I’ll admit, not that well. That’s not because of limited talent, but because I never put enough into it, never tried my best.  I can and do bang out some tunes, but I never could justify doing so on a Steinway.

 

Perhaps it’s the cost, or maybe my fingers aren’t up to the company’s standards. But I do own a Samick grand. It’s several years old, and I did my research back then and believe it’s a great piano. The company makes lesser pianos than mine, so its reputation varies depending on whom you might ask. But if you asked my tuner, it’s a great piano.

 

Henry might not have been a virtuoso, but he did know how to cater to them. As one of the few family members who knew how to keep the company going, he did his best, and did it well, for years until coming to the conclusion that the best course of action for the company, the brand and the family was to sell it. Since then it’s been in different hands, including, of all things, CBS Corp and Boston Investors.

 

One bit of trivia about the company. Did you know that, long ago, it actually was an automobile manufacturer? And the brand? Back then, it too was the best, but no longer is Rolls Royce the name in cars.

 

Another fellow who did his best in multiple lives died at 83 years.

 

By now everybody has learned that Paul Newman is dead. No new news is being broken here.

I will share that I admired Paul’s work, not just in some of my all-time favorite films such as 1982’s The Verdict, which I screened again only last week, but also as one of the better race car drivers, especially in those old Nissan/Datsun cars, and as a genuine philanthropist with taste. Some of his recipes for sauces, dressings and, yes, coffee roastings are pretty damn good.

 

Speaking Engagements

 

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the presidential election in the seat of the federal government.

 

Join Roger Conrad, Elliott Gue and me for the DC Money Show Nov. 6-8, 2008, at The Wardman Park Marriott.

 

Click here or call 800-970-4355 and refer to priority code 011363 to register as my guest.

 

I’ll also be appearing at the following events:

 

  • North Bay Investors Forum, Santa Rosa, CA, Oct. 11, 2008
  • The World Money Show, London, England, November 2008
  • The 2008 KCI Investing Cruise, Dec. 1-12, 2008

 

If you’re interested in having me or one of my cohorts address any investment or professional groups, please e-mail me at paymeweekly@kci-com.com with ideas or suggestions.