A Better Order

A reader responds:

Thank you for having written as you have. My dad, in the Great Depression, used his job loss as a printer in a minor newspaper, to go to Cornell University, and then to Columbia University, to become a physician. The Depression was the best thing in his life, because it forced him to change his life for the better. He did this with almost no money, and lots of small side jobs, and some welcomed aid from Columbia, for which he was forever grateful.

I have said to my graduate school alma mater, and to my current university president, that we should give some thinking about how to double our enrollments, while cutting costs, in order to serve a massive demand for low income adults to get further education during their down time. But they look at me like I am insane or fear mongering.

Your thinking is like mine. We should start to get ready, while also hoping that maybe there will be no need after all.

Floyd Rudmin

Time to Plan for the Worst

By Greg Moses

CounterPunch / DissidentVoice / TheRagBlog

Anyone taking a crash course in market theory these days is seeing downside risks aplenty. Market theory uses the term “correction” to describe the general system of a down. But if these downside risks become reality, are progressive organizers ready? So far, market theory merely describes downsides for investors. The point is to put it to work for a more progressive correction.

Prior to the August recess of 2009, state actors might have done something to alleviate the crush rather than postpone it. Instead, our policy machinery has been spinning away in bubble land. As Mike Whitney sez, “It’s been two years since the crisis began and nothing . . . NOTHING has been done to fix the banking system.” A public ethic that is prepared to anticipate and seize opportunities for correction might do some good work in displacing the gaps that policy leadership won’t close.

Of course, we should pray to be wrong when we forecast a hurricane headed our way. But we should also get busy making preparations – both individually and socially. What would a progressive response to depression look like? Food, shelter, utilities, health care, education, and opportunities for productive labor – these are a few items to get us started. We certainly won’t be allowed to forget the challenge of peace.

A progressive approach might begin by imagining the correction of workable relationships not yet displaced, whether they are public, nonprofit, cooperative, or profit-seeking. This notion of relationship correction is developed as a first response against popular images of crisis that divide reality into so many warring units of self-preservation. Individualistic – and usually well-armed – imaginations have striking cultural power. They are certainly the kinds of ideas that count for ‘original intent’ in the USA.

Grassroots progressive planning can help to grow another kind of imagination, but it won’t be the dream of all things collectivized. Transforming all relationships from private to public is not the same thing as making the world productive, ethical, or just. Versus agendas for complete nationalization on the one hand or complete privatization on the other, therefore, a progressive agenda might prepare some realistic guidelines for crisis planning that are corrective, liberating, and respectful of the workable past.

Grocery stores and department stores can deliver goods to market. Soup kitchens and homeless shelters can meet basic needs. Schools – with their lunchrooms, classrooms, and gyms – help people to grow in many ways. Progressive planning can try to keep these institutions functioning together even as they are – all of them – corrected.

By rehearsing progressive responses in advance of crisis it may be possible to prevent excesses of panic and conflict that we are just beginning to see. As some forms of assets continue to implode and take productive capacities down with them – putting people into frightened and frightening moods – we might focus on assets that can be preserved, reconstructed, reorganized, and even extended nevertheless. Already some voices are talking of depression as re-education. We might think of a great depression as a great teacher and then throw ourselves into the learning and unlearning that great education requires.

Against the already growing conflicts between one-sided responses, I think progressive plans for depression might anticipate the blame game. One side is prepared to blame socialism. Another side will blame capitalist greed. Progressive reformers can perhaps strike a mediating position that looks for corrections both in the buildup and misuse of state power and in the pursuit of market growth. While some voices would have us learn the neglected value of personal responsibility, others will encourage nurturing communal interdependence. A progressive agenda might remind both sides how neither can speak the whole truth.

On questions of capital, I have been drawn to San Francisco economist Henry George because of the way he thinks about public and private coordination. He has a strong sense of public responsibility and a keen respect for entrepreneurial talent. A progressive approach to corrections in capital development would be neither public nor private en bloc. Our right to commons does not have to overturn our right to private properties – or vice versa.

Right wingers focus on workers’ dependence upon capital growth and earnings, while left wingers point out there can be no capital without labor first. A progressive agenda schooled in market theory might be able to transform these colliding interests into a more humane and more flexible economy. Capital is like seedcorn as right wingers claim, because capital contributes to next year’s harvest. But capital is also something very different from seedcorn, as left-wingers can demonstrate, because the collective organization typically demanded by capitalists prevents actual harvesters of seedcorn from calling it their own next year.

Perhaps the great opportunity of the correction challenge is to work out a more progressive approach to the relationship between capital and labor such that the seedcorn we all help to harvest throughout the work-day is treated as a resource worthy of intense public concern. This doesn’t necessarily mean that capital is taken out of private hands, but it does mean that private holders of returns on investment have real obligations to the social labor that makes all earnings possible.

It can’t hurt to deliberate progressive plans and principles for a coming correction. Even if the crisis never comes, the exercise will help us to discover how real peace can be fought for.

By Greg Moses

According to Kantian ethical principles what counts is good will. This means that one acts in accordance with principles that can be willed as universal principles (the categorical imperative). For Kant, there is no moral content in actions that are based upon some estimation of return (hypothetical imperatives). So I just want to make it clear that what I am about to say has nothing to do with investment advice for anyone seeking return.

But if one might be interested in putting money into circulation in equities markets where it can be put to work by employers. And if one wants to select employers who will not be turning out military weapons, then here’s something to consider.

There are two ETFs which would yield participation in a broad global portfolio excluding the manufacture of military weapons. The iShares KLD 400 Social Index ETF that trades under the ticker symbol DSI offers broad coverage of US equities roughly equivalent to the S&P 500 but excludes military weapons manufacturers. The KLD Domini 400 Social Index which underlies DSI is a path breaker in the history of socially responsible investing.

In addition, the JETS Dow Jones Islamic Market International Index Fund that trades under the ticker JVS offers broad coverage of international (ex-US) equities with an active screen against military weapons manufacturers. JVS is also a pathbreaking investment tool, since it is the first “Sharia-Compliant” ETF in the USA, based upon one of the many Dow Jones Islamic Market indexes (the International Titans 100).

If combined as a “good will” investment strategy, DSI and JVS would offer global participation in large cap equities that do not (by and large in their core businesses) produce military weapons.

Disclosure: the author owns a few shares of DSI and JVS.

By Greg Moses

As the introductory article at Seeking Alpha warns, Islamic investing is not always about selecting companies that purport to be be Islamic or that do business in predominantly Islamic markets.

In the case of a new Exchange Traded Fund (ETF) offered by Javelin Exchange Traded Shares (JETS) and known as the JETS Dow Jones Islamic Market International Index Fund (JVS), the top company held is BP (4.94 percent) and the top country represented is the UK (18.11 percent).

According to a press release at javelinfunds.com the JVS fund began trading on the New York Stock Exchange (NYSE) June 30, 2009. While Islamic ETFs have traded in other countries, this is the first Islamic ETF to trade in the USA.

As the name of the fund suggests, it is based upon one of the Dow Jones Islamic indexes–the DJ Islamic Market International Titans 100 IndexSM.

As explained by the DJIM Family Brochure, the first of the DJ Islamic Market indexes was constructed in 1999 as “the first attempt by any global index provider to create a measurement tool for Shari’ah compliant investors and to reduce the research costs of ascertaining and measuring Shari’ah compliance by creating a global universe of Shari’ah screen companies approved by a Shari’ah Supervisory board.”

As of the date of this post, the Dow Jones Islamic Market International Titans 100 IndexSM is not readily accessible at the djindexes website. A similar Titans 100 Index is constructed from a combination of the DJIM U.S. Titans 50 IndexSM, the DJIM Europe Titans 25 IndexSM, and the DJIM Asia/Pacific Titans 25 IndexSM. It’s not clear at this time what sorts of regional weightings are used by djindexes to construct the ex-US International Titans 100 Index.

In order to produce the universe of equities eligible for the DJIM International Titans 100 Index, Dow Jones pulls from the “eligible universe” of companies in the DJIM World Index. The DJIM World Index in turn is compiled from 55 country-level indexes.

Now in order for companies to be listed on DJIM country indexes in the first place, they must pass through several screens.

According to the Guide to the Dow Jones Islamic Market IndexesSM
(June 2009) there are certain business activities that are “inconsistent with Shari`ah precepts”: Alcohol, Tobacco, Pork-related products, Conventional financial services (banking, insurance, etc.), Weapons and defense, and Entertainment (hotels, casinos/gambling, cinema, pornography, music, etc.).

If the company has business activities in any one of the following sectors defined by the Industry Classification Benchmark (ICB), it is considered inappropriate for Islamic investment purposes and is excluded from the index.

• 2717 Defense
• 3533 Brewers
• 3535 Distillers & Vintners
• 3577 Food Products
• 3745 Recreational Products
• 3785 Tobacco
• 5337 Food Retailers & Wholesalers
• 5553 Broadcasting & Entertainment
• 5555 Media Agencies
• 5752 Gambling
• 5753 Hotels
• 5755 Recreational Services
• 5757 Restaurants & Bars
• 8355 Banks
• 8532 Full Line Insurance
• 8534 Insurance Brokers
• 8536 Property & Casualty Insurance
• 8538 Reinsurance
• 8575 Life Insurance
• 8600 Real Estate Development & Holding
• 8773 Consumer Finance
• 8775 Specialty Finance
• 8777 Investment Services
• 8779 Mortgage Finance

Companies which pass this test will then be subjected to a further screen for Acceptable Financial Ratios:

All of the following must be less than 33%:
• Total debt divided by trailing 12-month average market capitalization
• The sum of a company’s cash and interest-bearing securities divided by trailing 12-month average market capitalization
• Accounts receivables divided by trailing 12-month average market capitalization

Companies that pass all the above screens “are included as components of the Dow Jones Islamic Market World Index.” And the index is reviewed on a quarterly basis.

Note: the above article was revised on July 8 thanks to an email from the JETS office clarifying the difference between the DJIM Titans 100 Index (added 9/7/2006) which is documented at djindexes–and the newer DJIM International Titans Index (added 3/4/2009) which is not yet documented at djindexes. The Bloomberg ticker symbol for the International index is DJI100XT:IND.  

By Greg Moses

“TIAA-CREF serves 3.6 million active and retired employees participating in more than 27,000 retirement plans and has $363 billion in combined assets under management (as of 12/31/08),” says the official website at tiaa-cref.org.

There are two “social choice” products offered by TIAA-CREF. First is the CREF Social Choice Variable Annuity founded on March 1, 1990 and reporting net invested assets of $7.29 billion as of June 30, 2009.

Next is the TIAA-CREF Social Choice Equity Fund (TRSCX), founded on Oct. 1, 2002 with reported net invested assets of $587.17 million as of June 30, 2009.

In this post I will be focusing on the Equity Fund (not the Variable Annuity). According to a 2009 Prospectus posted at the TIAA CREF website:

The [Social Choice Equities] Fund [TRSCX] primarily invests in companies that are screened by KLD Research and Analytics, Inc. (“KLD”) to favor companies that meet or exceed certain environmental, social and governance (“ESG”) criteria. The Fund does this by investing in companies included in the KLD Broad Market Social IndexSM (the “KLD BMS Index”) . . .

At the KLD website (kld.com) we find a press release dated July 8, 2008 describing how the KLD BMS Index is constructed.

The KLD BMS Index is comprised of 1,875 companies drawn from the “eligible universe” of the 3,000 largest US equities (the press release does not mention the Russell 3000 by name).

Three KLD social indexes are combined to make up the Broad Market Social Index. The “eligible universe” is divided into large cap, mid-cap, and small cap ranges. Of the 400 large cap stocks eligible for selection, 247 “social stocks” are chosen. Of the 600 mid-cap stocks, 384 are chosen. And of the 2,000 small cap stocks, 1,244 are selected for social investing. The percentage of stocks selected from each market cap index ranges from about 62 percent to 64 percent.

To select the stocks, KLD assigns ESG scores to each company for Environmental, Social, and Governance practices. Then the stocks are arranged in sectors. From each sector, the top 60 percent of stocks are selected based on ESG scores (the press release says KLD targets the top 65 percent).

In the screening process, adverse weight is given to participation in “certain business activities, such as the manufacture of alcohol, tobacco products or weapons.” Instead of applying a zero-tolerance policy with respect to these business practices, the KLD Broad Market system screens out a certain “threshold” of activity.

“KLD has expanded its ESG analytical framework so that its rating system reflects the social and environmental impact of the production and sale of alcohol, tobacco products, military and civilian weapons, nuclear power and gambling products and services,” says the press release.

Due to the introduction of new indexes and a lowering of the market capitalization targets, the total number of companies in the BMSI series of indexes has decreased. However, due to the modification of exclusionary screens, KLD has a larger pool of companies to select from in sectors such as industrials (previously subject to military weapons exclusions), utilities (nuclear power), consumer staples (alcohol) and consumer discretionary (gambling). This expansion of the pool of eligible companies has led to an increase in the average ESG performance of companies in the BMSI series.

“Companies with strong ESG performance are no longer automatically excluded for minor involvement in a screened activity,” said Thomas Kuh. “As more investors consider ESG factors, the KLD Broad Market Social Index series enables investment managers to provide their clients with greater market cap segmentation and holdings with higher ESG performance.”

After the KLD Broad Market Social Index is constructed, it is deconstructed into two “composite indexes.” First, the “social selections” from the mid-cap stocks are combined with the “social selections” from the large cap stocks to produce a composite large-mid index of 631 social stocks (LMSI: 63.1 percent of 1,000 stocks).

Next, the social stocks from the mid caps are combined with the social stocks from the small caps to make a composite small-mid index of 1,628 stocks (SMSI: 62.6 percent of 2,600 stocks).

In the end, here were the top ten large-cap stocks designated as KLD social in July 2008: Microsoft Corp., Procter & Gamble Co., Johnson & Johnson, IBM, Cisco Systems, Google Inc., Intel, Bank of America, Hewlett-Packard Co., and Pepsico.

Here were the top ten mid-cap stocks: Petrohawk Energy Corp., NYMEX Holdings, Inc., Helmerich & Payne, Inc., Steel Dynamics, Inc., SandRidge Energy, Inc., BMC Software, Inc., The Estee Lauder Co’s Inc., Mattel, Inc., Cabot Oil & Gas Corp., and Embarq Corp.

And here were the top ten small-caps: Dril-Quip, Inc., Delta Petroleum Corp., ADC Telecommunications, Inc., Nicor, Inc., Swift Energy Company, Complete Production Services, Inc., Potlatch Corp., EMCOR Group, Inc., American Superconductor Corp., and Goodrich Petroleum Corp.

Disclosure: the author owns shares of both social choice products from TIAA-CREF.

According to the Green Century Equity Fund (GCEQX) profile at Yahoo Finance, the fund’s date of inception was Sept. 13, 1995.

“The Fund seeks to achieve its objective by investing in the stocks which make up the Domini 400 Social Index (the KLD 400 Index),” says the 2-page Fund Brief posted at greencentury.com.

For more info on the history and nature of the Domini 400 Social Index, see the article below on Social Investing with ETF Funds.

The GCEQX fund’s administrator and advisor, Green Century Capital Management, was founded in 1991 “by a partnership of non-profit environmental advocacy organizations,” says the Fund Brief. As a result of this legacy:

Summary: KLD excludes tobacco. DSI excludes tobacco, alcohol, firearms, military weapons, gambling, and nuclear power.

By Greg Moses

According to background materials posted at Domini.Com, the first “social index” for investors was rolled out in 1990 by Amy Domini and her partners, Peter Kinder and Steve Lydenberg.

The Domini 400 Social Index was “an index of 400 primarily large-cap U.S. corporations, roughly comparable to the S&P 500, selected based on a wide range of social and environmental standards.”

Today Domini and Lydenberg oversee a half-dozen mutual funds at Domini Social Investments, while their original indexing partner Kinder continues to manage the Domini 400 Social Index (DS400) at KLD Research & Analytics, Inc. (kld.com).

In addition to the DS400 index, KLD offers a half dozen Sustainability Indexes (which they properly call Indices) and the KLD Select Social Index.

KLD also offers a research service with searchable databases for investors who want to keep tabs on “the social, environmental, and governance (ESG) performance of corporations.”

Jan. 24, 2005 was the inception date for an Exchange Traded Fund (ETF) based on the KLD Select Social Index. It is offered by iShares under the ticker symbol KLD. According to the fact sheet for the KLD ETF, the index underlying the fund is comprised of about 250 companies selected from the S&P 900 on the basis of “ESG scores” –tobacco companies excluded.

On Nov. 14, 2006, iShares followed up with an ETF based on the Domini 400 Social Index (DSI). The fact sheet for the iShares KLD Social 400 ETF says that 250 of the companies in the index come from the S&P 500. To these companies are added another 100 large and mid-sized companies along with 50 smaller ones.

The fact sheet for the KLD Domini Social 400 Index that underlies DSI shows that the negative screen is more demanding than with the KLD Select Social Index that underlies KLD. KLD excludes tobacco. But DSI also excludes “companies engaged beyond specific levels of involvement in Firearms, Alcohol, Military Weapons, Gambling, and Nuclear Power.”

As of July 2, 2009, the portfolio tracker at MarketWatch.Com reported that KLD had an average volume of 19.6k per day, whereas DSI had an average volume of 7.70k.

Disclosure: the author owns some shares of DSI.