Week in Review: Markets steady amid bailout hopes and mixed economic signals

For the week ended March 2, 2012

• Signs of eurozone contraction grow
• ECB injects €529.5 billion to 800 lenders
• US GDP revised up to 3.0%; other indicators mixed
• Asian economies show resilience
• Fannie Mae posts $2.4 billion loss; US, Canadian banks prosper

Global stock markets enjoyed a fairly quiet week after rallying on news that the European Central Bank would add more liquidity to help the region's banks.

On Tuesday, the Standard & Poor's 500 Stock Index hit its highest level since the financial crisis began and the Dow Jones Industrial Average closed above 13,000 for the first time since the onslaught of that crisis. Meanwhile the Nasdaq Stock Market hit an 11-year record.

However, a number of negative economic reports from the eurozone pointed to ongoing challenges and the likelihood that the region is already in a recession. US economic data were mixed, with fewer jobless claims and rising consumer confidence offset by lower durable goods orders and falling home prices. Several Asian nations reported growth in manufacturing activity.

The European Central Bank’s injection of €529.5 billion in low-interest loans to 800 banks helped inject some liquidity into the eurozone economy and ease concerns about the European debt crisis. The almost-completed Greek bailout continued to cause concerns. Standard & Poor’s downgraded Greece’s credit rating to "selective default" in response to the government’s decision to force losses on bondholders who do not accept a 53% write-down of the country’s debt. However, the International Swaps and Derivatives Association said it does not expect to make payments on credit default swaps linked to Greece’s bonds.

The price of oil rose above $110 per barrel in response to growing tensions over Iran’s nuclear program and a potential preemptive attack by Israel that could interrupt global oil supplies. The price of gold fell sharply midweek in response to US Federal Reserve Board Chairman Ben Bernanke giving no indication of further central bank efforts to boost liquidity and the ensuing rise in the US dollar.

U.S. and global economic news

Eurozone contraction signaled
The eurozone unemployment rate hit a 15-year high of 10.7% in December, according to Eurostat, the European Union’s statistics agency. Coupled with a report that eurozone manufacturing activity shrank and the annual rate of inflation rose in February, the latest economic data point to the likelihood of continued contraction for the eurozone economy in the first quarter of 2012 after it shrank 0.3% in the fourth quarter of 2011.

ECB makes €529.5 billion available to lenders
The European Central Bank made available €529.5 billion in inexpensive three-year loans to 800 lenders following an initial liquidity injection of €489 billion to 523 banks in late December. The ECB’s long-term refinancing operation (LTRO) is emerging as a powerful tool in its ongoing effort to avoid a financial crisis in Europe.

S&P cuts Greece to "selective default"
Standard & Poor’s cut Greece’s credit rating to “selective default” in response to Greece’s move to impose losses on all holders of Greek government bonds, even if bondholders do not agree to the deal to write down the country’s debt by 53%. Greek bondholders have until March 12 to agree to the offer in order for Greece to secure the bailout money it needs to pay €14.5 billion in bond obligations on March 20. S&P indicated this could be a temporary downgrade, pending the consummation of the country’s debt swap.

Mixed US economic data offer plenty for bulls and bears
A mixed bag of US economic data gave fodder to bulls as well as bears. For bulls, fourth-quarter gross domestic product rose at an inflation-adjusted annual rate of 3.0%; weekly jobless claims dipped by 2,000 to their lowest point in four years; the Institute for Supply Management-Chicago’s business barometer rose in February; and the Conference Board Consumer Confidence Index hit a one-year high in February. However, bears had a large amount of news to digest: Durable goods orders decreased by 4% in January after rising the three previous months; home prices fell by 4% in 2011, according to the Standard & Poor’s/Case-Shiller Home Price Indices of 20 metropolitan areas; and the Institute for Supply Management’s factory index grew less than forecast in February, showing slowing growth.

Japan shows signs of growth amid contraction
Although Japan’s economy shrank an annualized 2.3% in the fourth quarter of 2011, business investment in Japan rose 7.5% from a year earlier, the first period of growth in three quarters, and industrial production rose 2% in January from December, according to Japan’s Ministry of Economy, Trade and Industry. However, deflationary pressure continued, with core consumer prices falling 0.1% in January from a year earlier.

Asian manufacturing resilient
Asia’s manufacturing sector is gathering strength, according to purchasing managers indices (PMIs) for several countries. China’s PMI rose to 51.0 in February from 50.5 in January. Taiwan’s industrial activity grew for the first time in eight months, with a reading of 52.7 in February, up from 48.9 in January. India’s PMI remained robust but declined slightly, to 56.6 in February, from 57.5 the previous month. Any reading over 50 indicates growth.

Indian economy slows
India’s robust economy continued to grow in the final quarter of 2011, but at its slowest pace in more than two years. The country’s gross domestic product rose 6.1% annually in the October to December period, down from a 6.9% annualized growth rate in the previous quarter.

Ireland announces referendum
Ireland’s government announced that it will call a referendum on the new European Union budget discipline treaty. Should Irish voters reject the deal, it would not necessarily cause the pact to fail, but the Irish government would lose access to financial help through the European Stability Mechanism, the eurozone’s bailout fund.

U.S. and global corporate news

Fannie Mae posts huge quarterly loss
Mortgage finance company Fannie Mae posted a $2.41 billion loss in the fourth quarter as its credit-related expenses soared as a result of falling home prices. Revenue fell 87.3%. Its credit-related expenses reached $5.51 billion, up from $4.32 billion in the fourth quarter of 2010 and $4.88 billion in the third quarter of last year.

US bank lending grows most in four years
US banks expanded their lending more in the last quarter of 2011 than they have in four years, according to the Federal Deposit Insurance Corporation. Banks also posted a total $119 billion profit in 2011, their highest collective earnings since 2006, before the housing boom went bust. Loan losses also fell to their lowest level since early 2008.

Canadian banks prosper, raise dividends
Royal Bank of Canada, Bank of Montreal, and TD Bank all posted better-than-expected quarterly profits. BMO benefited from its acquisition of US regional bank Marshall & Ilsley, while RBC and TD enjoyed record earnings in their domestic consumer and business banking operations. RBC and TD both raised their quarterly dividends, demonstrating confidence in the strength and stability of their businesses. It was RBC’s second dividend increase in less than a year; for TD it was the third dividend increase in a year.

Higher auto sales for second consecutive month
US auto sales accelerated for a second consecutive month in February. Chrysler reported a 40% rise in sales from a year earlier; Ford Motor had a 14% sales growth; and sales of General Motors vehicles increased 1%. Imported vehicle sales grew as well: Toyota Motor and Honda Motor sales gained 12% each while Nissan’s rose 16%.

The week ahead

• The European Union releases its fourth-quarter GDP report on Tuesday, March 6.
• Japan issues its revised fourth-quarter GDP report on Wednesday, March 7.
• Germany releases its manufacturers’ orders data on Wednesday, March 7.
• The US Department of Labor releases its monthly nonfarm payrolls report on Friday, March 9.
• The United Kingdom, France, and Italy issue their industrial production reports on Friday, March 9.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report. Full holdings are also available on the individual Fund Profile tab in the Products and Performance section of mfs.com.

Past performance is no guarantee of future results.
Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com.
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Strategist's Corner

By James Swanson, CFA
MFS Chief Investment Strategist
February 29, 2012

Has the S&P 500 gotten ahead of - or behind - itself?

With the Standard & Poor's 500 Stock Index up nearly 8% in 2012, analysts and individual investors are asking themselves whether its gains are overdone. There are so many ways we can look at this question; formulas abound for determining where a market should be and when.

How much is the market worth?
To assess the value of stocks and stock markets, analysts look at a variety of measures. They compare stock prices and the overall market to earnings. They also measure the price of the market to sales, to book value, and even to adjusted earnings (earnings adjusted for cycles by using averages). By most of these measures, the market is decidedly lagging.

But, it seems to me, something has been skewing these measures. Maybe the market has not acted in accordance with historical patterns because the mountains of debt in the United States, Europe, and Asia are damping demand. Perhaps investors are fearful that this debt will eventually threaten economic growth and as a result hurt corporate earnings. Fears of a banking crisis in Europe have also held markets back.

Cycles, elections, and seasons affect the market
Other less mathematical patterns have also been scrutinized for clues to where the market is headed.

• Market cycles: Long-term historical averages show that stock market cycles, especially those tied to recessions and expansions, last about five years. That analysis suggests that the S&P 500 has higher to go. In the post-World War II period, markets have typically gained about 188% after hitting a bottom during a recession. For this purpose, we will consider that the level hit in March 2009 to be the bottom or zero point. By this measure, the market, now three years into the cycle, should be up 120% today. But over the past three years, the S&P 500 has gained only 104%. This logic suggests that the market has further to rally.
• Elections: During a typical election year, the market rises on average 9%. So by that measure the S&P 500 may be poised for a pullback because it has already risen 8%, and we are only in the first quarter of the year. Markets typically post a strong performance at the beginning of an election year. Equities then tend to level off or even enter a volatile period as uncertainty mounts with the nearing of the actual election date.
• Seasons: Some believe seasonal factors also affect market performance. The market tends to do well in the early part of the year, "take a vacation" in the spring and summer, and rally with a vengeance in the fall. However, if you look through enough history books, you can find arguments for and against this pattern.

I look to corporate fundamentals for the clues
With all this said, I prefer to look at the fundamentals to get an idea where the market is going. It seems to me that over the long term investors want to see earnings performance. They want to see dividends or a terminal value of a company determined by how it does compared to interest rates, other companies, and other investment choices. Right now, rates are low, earnings and cash flows are rising, and the economy is growing. The tide is moving in a positive direction.

The market has not kept pace with earnings. For the past eight quarters, the profits of companies in the S&P 500 have exceeded expectations by record-breaking margins. The index has not risen a commensurate amount.

If we determine that the market is indeed driven by earnings, we need to determine its value in relation to bonds. And in this match there is no contest. Earnings and cash flow yields of stocks far outweigh the earning power of bonds, but with more risk.

I think the evidence for the market's fundamental strength is convincing. Earnings and margins are underpinned by low unit labor costs, higher productivity, and reasonably healthy consumer demand.

Sure, the potential of a smack down exists, but to me the possibility of this being a market "behind itself" is much stronger.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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Week in Review: Greek debt deal, other upbeat reports lift markets

For the week ended February 24, 2012

• Greek bailout deal finally complete
• US data on housing, jobs, consumer sentiment positive
• EU sharply downgrades region's economic growth outlook
• Chinese central bank cuts reserve requirements to boost economic activity
• H-P, Sears, Wal-Mart, and RBC post disappointing earnings

The week was mildly positive for global stocks after the Greek parliament and eurozone officials agreed to the terms of a Greek bailout deal. Despite ongoing concern regarding the financial viability of other eurozone members, the current deal, which will enable Greece to make its debt payments in March, assuaged some investor concerns. Economic news in the United States was primarily positive and provided more evidence of a housing and jobs recovery. In Europe, however, the news was not so upbeat. The European Union sharply downgraded its growth outlook for the region's economies.

One concern of investors is the potential impact that rising gasoline prices will have on consumer confidence and spending. The price of gasoline in the United States averaged $3.65 in the week ended February 18, up $0.40 from a year earlier. The price of a barrel of crude oil rose to $108 per barrel, up about $4 this week in response to growing tensions surrounding Iran, its nuclear capability and a potential Iranian oil embargo. The price of a barrel of Brent crude rose above $123. Corporate earnings reports showed a wide range of results, holding markets back from any strong move in either direction. However, several blue-chip firms posted large losses. The Dow Jones Industrial Average flirted with the 13,000 mark, and other major US indices were at or near four-year highs.

U.S. and global economic news

Greek bailout deal completed after months of anticipation
After months of anticipation and marathon meeting, Greece finally secured a second bailout. At a 13-hour meeting Monday and Tuesday, eurozone finance ministers agreed to save Greece from bankruptcy with a bailout of €130 billion in exchange for strict austerity measures. The goal is for Greece to reduce its debt to just over 120% of its gross domestic product by 2020 from about 160% now. On Thursday, Greece’s parliament approved a bill clearing the way for a massive debt restructuring, which will ease about €107 billion from the country’s sovereign debt burden. Investors in Greek bonds will lose about 75% on the bonds, based on a 53.5% loss of their face value.

US housing, jobs data, consumer sentiment positive
The US economy received several votes of confidence this week. Existing home sales rose 4.3% in January, reported the National Association of Realtors. The inventory of previously owned homes for sale fell to just over a six-month supply. Sales of new homes dipped 0.9% in January, exceeding forecasts, according to the US Department of Commerce. The weekly tally of initial claims for jobless benefits remained at 351,000, while the four-week average fell to 355,000, its lowest level since March 2008. Further underscoring the positive mood was a fifth consecutive gain in the weekly Bloomberg Consumer Comfort Index. The Thomson Reuters/University of Michigan final index of consumer sentiment rose to 75.3 in February, from 75 in January, beating expectations.

EU sharply downgrades region's economic growth outlook
The European Union sharply downgraded its growth outlook for the region's economies. Other reports showed overall business activity in the eurozone contracted in February and the eurozone purchasing managers’ index dipped to 49.7 from 50.4 in January. On a more positive note, consumers in the eurozone gained confidence for the second straight month in February, according to the European Commission. German business confidence rose in February to its highest point since last July, the Ifo Institute reported.

Chinese central bank cuts reserve requirements to boost economic activity
China’s central bank announced that it would cut bank reserve deposits by 0.5% to encourage lending and stimulate growth. Meanwhile, the preliminary HSBC China Manufacturing Purchasing Managers Index remained a shade below 50 at 49.7 in February, up slightly from January’s final reading of 48.8.

UK surplus grows
The UK government enjoyed its largest surplus in four years in January, spending €7.8 billion less than it took in on increased revenues from income and corporation taxes.

U.S. and global corporate news

Allianz profit misses forecasts, but upbeat on 2012
Despite missing fourth-quarter and full-year net profit expectations, Allianz, Europe’s largest primary insurer by market value, is optimistic about this year’s operating earnings. Its 2011 results were hurt by weak markets, many disaster claims, and a write down of Greek debt to 24.7% of its nominal value.

H-P in the red as earnings decline across the board
Hewlett-Packard saw declines across most of its businesses in its first fiscal quarter, ended January 31. Overall profit for the PC and printer manufacturer fell 44% on a 7% decline in revenue. Operating profits in its services, printers, servers, and PC segments declined by more than 30% for the quarter. H-P also forecast lower-than-expected results for the current quarter.

Sears posts huge quarterly loss
Sears Holdings posted a $2.4 billion fourth-quarter loss after taking a $2.5 billion accounting charge related to deferred tax assets, impairment of goodwill, store closings, and severance. The retailer plans to spin off some 1,250 stores and cut costs through store closings, head count reductions, and reduced marketing expenses.

Wal-Mart earnings fall
Profit declined 15% at Wal-Mart Stores in the fiscal fourth quarter as the world’s largest retailer incurred higher costs, and as its lower-income customers were hurt financially by higher gasoline prices and high levels of unemployment. Revenue rose 5.9% but US same-store sales, excluding fuel, were up just 1.5% at namesake stores and 5.4% at Sam’s Club.

Home Depot profit rises on robust sales
Home Depot posted a 32% gain in fourth-quarter earnings on strong sales. Same-store sales were up 5.7% overall, and 6.1% in the United States.

Kraft profits up despite higher costs
Kraft Foods’ saw a healthy 54% increase in its fourth-quarter earnings as higher prices boosted its revenue even as increased costs trimmed margins. The packaged food giant’s revenues rose 6.6%.

Royal Bank of Scotland loses more than €2 billion
Royal Bank of Scotland, feeling the impact of the eurozone debt crisis, posted a 2011 full-year net loss of almost €2 billion. The bank, 83% owned by the British government, was particularly hurt by a sharp drop in profit in its investment banking business.

British American Tobacco lights up strong earnings
British American Tobacco announced an 11% increase in annual profit as the London-based cigarette maker increased sales with its expansion into high-growth economies in eastern Europe, Africa, the Middle East, and Asia.

Volkswagen profit more than doubles
German auto manufacturer Volkswagen more than doubled its annual profit in 2011 after revenue grew 26% and after it booked substantial gains on its holdings in sports car maker Porsche.

The week ahead

• Lowe’s announces its earnings on Monday, February 27.
• The U.S. Commerce Department releases its Durable Goods Orders report on Tuesday, February 28.
• The European Union releases its Economic Sentiment report on Tuesday, February 28.
• Costco announces its earnings on Wednesday, February 29.
• The Chicago Purchasing Manager Index is released on Wednesday, February 29.
• The Bloomberg Consumer Comfort Index is released on Thursday, March 1.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report. Full holdings are also available on the individual Fund Profile tab in the Products and Performance section of mfs.com.

Past performance is no guarantee of future results.
Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com.
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Week in Review: Investors tense ahead of Greek debt agreement

For the week ended February 17, 2012

• Greek bailout hopes rise
• Moody's cuts ratings for six European countries, puts banks on review
• Bank of Japan moves to stimulate economy
• Eurozone economy shrinks slightly in fourth quarter
• GM posts record earnings

Global equities markets were flat this week after investors endured days of uncertainty, resulting from European policymakers' inability to cement an agreement on a Greek bailout and restructuring package.

Adding to the tension, Moody’s cut its debt ratings for six European countries, including Spain and Italy. The credit rating agency also placed numerous large banks in Europe and North America on review.

In the United States upbeat data assuaged some fears. After dipping sharply on Wednesday, the Dow Jones Industrial Average traded near a four-year high Thursday. U.S. weekly unemployment claims fell to a four-year low, housing activity rose, and inflation gauges showed modest rises.

The U.S. Congress extended the U.S. payroll tax deal through the end of 2012, taking it off the table as an election campaign issue, and continuing a mild but steady form of economic stimulus for 160 million American workers.

U.S. and global economic news

Greek bailout hopes rise
Drama rose surrounding the highly anticipated €130 billion bailout of Greece, which would allow it to make its March 20 bond redemption obligation of €14.5 billion among other payments. As the clock ticked, the Greek government approved austerity measures necessary for fellow eurozone member countries to sign off on a bailout package. The eurozone finance ministers initially hesitated to agree to the package as they felt the austerity measures didn’t go far enough. However, recent reports indicate they will likely approve the package on Monday. The bailout will require contributions from the International Monetary Fund, European Central Bank and European Union.

Moody’s cuts ratings for Italy, Spain and other countries
Moody’s Investors Service cut the credit ratings for six European countries: Italy, Spain, Portugal, Slovakia, Slovenia, and Malta. Spain was downgraded to A3 from A1, Italy to A3 from A2, and Portugal to Ba3 from Ba2, all with a negative outlook. The ratings agency also revised its outlook for the United Kingdom, France, and Austria to negative. However, all three countries kept their Aaa ratings.

Bank of Japan moves to stimulate economy
The Bank of Japan made a surprising move to stimulate the Japanese economy and battle deflation by expanding its asset purchase program. The BOJ added ¥10 trillion ($128 billion) to an asset-purchase program and set an inflation target to counter its stagnant, deflationary economy, which shrank 2.3% last quarter. The yen is expected to weaken as a result of this action, helping Japanese exporters.

U.S. weekly jobless claims fall; four-week average at four-year low
Initial jobless claims by U.S. workers decreased by 13,000 to 348,000 for the week ended February 11, the fewest since March 2008, according to the U.S. Department of Labor. The four-week low fell to 365,250. The number of continuing unemployment benefit claims drawn by workers for more than a week fell by 100,000 to 3,426,000 in the week ended February 4, the lowest since August 2008.

Eurozone economy contracts 0.3%
The eurozone economy shrank in the fourth quarter, but gross domestic product decreased by a slim 0.3%, less than had been expected. Germany’s economy, which makes up one-fifth of the eurozone’s economic output, fell 0.2% during the quarter, while France’s economy unexpectedly grew. German business sentiment improved in January and German investor confidence rose to a 10-month high in February.

U.S. inflation tame according to two key measures
U.S. inflation remains quite tame based on both the wholesale producer price index and the Consumer Price Index. The CPI rose just 0.2% in January from December and 2.9% over the past year. The core CPI, excluding energy and food items, climbed 0.2% for the month and 2.3% on the year. The producer price index rose a seasonally adjusted 0.1% in January from December, and was 4.1% higher than a year ago. Excluding volatile energy and food costs, the wholesale gauge was up 0.4% on the month and 3.0% year over year.

U.S. housing starts rise; warm weather a possible factor
Home construction increased 1.5% in January, a possible sign of recovery in the fragile U.S. housing market, the U.S. Department of Commerce reported. The seasonally adjusted annual rate of 699,000 housing starts compared well to the previous three years’ numbers––609,000 in 2011, 587,000 in 2010, and 554,000 in 2009. However, the fourth-warmest January on record might have helped.

Mortgage delinquencies at three-year low
In another positive sign for the U.S. housing market, 7.6% of residential mortgages were at least 30 days past due on their payments at the end of 2011, down from 8.3% a year earlier, and a drop from a peak of 10% early in 2010.

U.S. economic indicators up for fourth straight month
The Conference Board’s index of U.S. leading indicators rose 0.4% in January, just shy of the 0.5% anticipated by economists surveyed by Bloomberg News. It was the fourth consecutive month of gains. Seven of the 10 indicators in the leading index rose.

U.S. and global corporate news

General Motors posts record profit despite stalling in Europe
General Motors posted its best year of profits ever, with net earnings of $7.6 billion in 2011 on strong North American sales, higher vehicle prices, and steady growth in China. Annual earnings in North America were $7.2 billion, up from $5.7 billion in 2010, and fourth-quarter results were much improved, at $1.5 billion in profits up from $813 million a year earlier. However, European results held GM back, with a $562 million fourth-quarter loss and $747 million for the year in the struggling region.

Moody’s places big banks on review
Moody’s Investors Service has placed Goldman Sachs, Morgan Stanley, Bank of America, Citigroup, Deutsche Bank, JPMorgan Chase and more than 100 other financial institutions, including many in Europe, on review for possible downgrade. Moody’s indicated some firms might have their credit ratings dropped by as much as three levels. The ratings agency said new economic and regulatory restrictions could limit the banks’ future growth prospects.

AMR posts billion-dollar quarterly loss
AMR, the parent of American Airlines, announced a fourth-quarter loss of $1.1 billion, compared with a quarterly loss of $97 million a year earlier. For the year 2011, AMR lost $1.98 billion, its fourth consecutive annual loss. In contrast, United Continental Holdings and Delta Air Lines posted annual profits of $864 million and $854 million, respectively.

BNP Paribas, AXA take hit from Greek debt write-downs
French bank BNP Paribas reported a sharp drop in its fourth-quarter profit, which fell 51% from a year earlier, largely on a €567 million write-down on Greek sovereign bonds and another €148 million charge to protect its balance sheet from the impact of the European debt crisis. The bank's revenue fell 6.1%. French insurer AXA also took a large write-down —€387 million––on Greek bond exposure in 2011. Its full-year revenue fell 4%. AXA seemingly had a good year, posting a 57% jump in profits, but that relative gain was largely a result of its year-earlier result being affected by a €1.6 billion loss on the sale of part of its U.K. life insurance business.

Deere profit rises 3.7%
Deere & Company’s earnings rose 3.7% in its fiscal first quarter as the world’s largest farm equipment manufacturer benefited from strong global demand. The company’s revenue rose 11%. Sales rose 22% outside of North America and 22% in Deere’s smaller construction and forestry-equipment segment.

The week ahead

• Wal-Mart and Dell announce their earnings on Tuesday, February 21.
• Hewlett-Packard announces its earnings on Wednesday, February 22.
• The National Association of Realtors releases monthly existing home sales data on Wednesday, February 22.
• Germany and the U.K. release their GDP data on Friday, February 24.
• The University of Michigan Consumer Sentiment Index is released on Friday, February 24.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report. Full holdings are also available on the individual Fund Profile tab in the Products and Performance section of mfs.com.

Past performance is no guarantee of future results.
Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com.
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Week in Review: Greek drama, more uncertainty weigh on markets

For the week ended February 10, 2012

• Greek bailout pending austerity measure ratification
• Central banks move to increase liquidity
• U.S. trade gap widens on domestic demand
• Chinese growth slows, inflation rises, imports fall sharply
• U.S. jobless claims drop

The drama and uncertainty over the Greek bailout package continued even after Greek government leaders finally agreed to a set of stringent austerity measures. Initial market optimism subsided and turned to speculation over whether the proposed measures would meet with domestic and eurozone fellow member approval. U.S. economic news continued on a positive trend overall, with fewer weekly jobless claims and rising demand for imports signaling economic recovery. However, gauges of U.S. consumer confidence gave conflicting readings.

Eurozone economic news was mixed, but signs of recovery in the United Kingdom and ongoing indications of German resilience helped keep markets and the euro buoyant. However, the euro retreated late in the week over renewed concerns about Greece’s ability to avoid a bond default. China reported fourth-quarter economic growth of 8.9%, its lowest pace of growth in two years, along with higher-than-expected inflation and a widening trade surplus on a sharp drop in imports. Overall, most global stock indices had modest movement during the week while U.S. Treasury yields rose.

U.S. and global economic news

Greek impasse continues
In response to the long-awaited agreement by Greek government leaders to a proposed set of austerity measures, European finance ministers said they would defer endorsing the pending €130 billion bailout package for Greece until after they review the austerity package. Meanwhile, a 48-hour Greek strike and street demonstrations underscore the challenges regarding domestic acceptance of the stringent measures. The package must still receive cabinet and parliamentary approval in the coming days. As a result, uncertainty over Greece and the larger eurozone debt crisis is expected to continue.

Central banks move to increase liquidity
The Bank of England and the European Central Bank introduced economic stimulus measures this week. The BOE said it will buy another £50 billion ($79.1 billion) of UK government bonds, bringing to £325 billion its cumulative bond purchases. Recent data indicate the United Kingdom may avoid a recession after a fourth-quarter contraction. The ECB announced that it is offering banks another round of low-interest three-year loans at the end of February.

U.S. trade gap grows as rising imports signal domestic recovery
The U.S. trade gap widened to a six-month high in December as the strengthening domestic economy led imports to rise 1.3% to $227.6 billion while exports increased just 0.7% to $178.8 billion. The trade deficit grew 3.7% to $48.8 billion from $47.1 billion in November, and the gap is expected to widen throughout 2012 as imports rise faster than exports.

Chinese economy grows 8.9%
China, the world’s second-largest economy, grew 8.9% in the fourth quarter from a year earlier, the slowest pace of Chinese economic growth in two years. China’s trade surplus widened as its imports dropped sharply. However, measures of domestic consumption might have been distorted by the timing and impact of the Chinese New Year. Chinese imports declined by 15.3% in January compared with a year earlier, while exports fell 0.5%.

U.S. consumer sentiment indices show varied results
The Thomson Reuters/University of Michigan Consumer Sentiment Index fell to 72.5 in early February, from 75.0 in January, reflecting concerns about shrinking paychecks among U.S. households. However, optimism over job prospects by survey respondents hit a record high. The Bloomberg Consumer Comfort Index, a weekly gauge, sent a different message, rising to -41.7 for the week ended February 5, a one-year high, from -44.8 the previous week.

U.S. weekly jobless claims fall; four-week average at four-year low
Initial jobless claims by U.S. workers declined by 15,000 to 358,000 for the week ended February 4, according to the U.S. Department of Labor. The four-week average fell to 366,250, its lowest level since April 26, 2008. U.S. employers have added 603,000 workers to their payrolls in the past three months.

European economic confidence rises for first quarter
Eurozone economic confidence climbed to 84.8 in the first quarter of 2012 from 83.7 in the fourth quarter, according to the German Ifo Institute's Economic Climate Indicator. A gauge of current conditions fell to 109.1 from 128.7, but a gauge that measures expectations rose to 70.5 from 57.4.

German manufacturing orders rise; industrial production falls
German manufacturing activity rose more than expected in December as a result of a strong rebound in orders from outside the eurozone. Overall, new orders rose 1.7% after declining 4.9% in November. After a drop of 10% in November, non-eurozone orders soared 12.3% in December while orders from within the eurozone fell 6.8%. German industrial production dropped by 2.9% in December, falling far short of a forecast 0.2% monthly gain.

France posts record annual trade deficit
France’s annual trade deficit reached a record in 2011, growing to almost €70 billion from €51.5 billion a year earlier. France’s share of global trade declined from 7.8% in 2003 to 6.2% in the fourth quarter of 2011. Meanwhile, Germany’s share grew to 16.2% from 14.7%, according to the French treasury.

Germany’s trade surplus declines in December
Germany’s adjusted trade surplus declined to €13.9 billion in December, down from €14.9 billion in November. Although Germany’s imports fell by 3.9%, its exports were 4.3% lower, more than offsetting the reduced level of imports.

UK trade deficit hits eight-year low
The United Kingdom’s overall trade deficit shrank in December to its smallest size since April 2003. A drop in imports highlighted continued weakness in the country's domestic economy, while exports rose on record foreign oil sales and a sharp increase in exports to Korea as a result of a Korea-European Union free trade agreement.

U.S. January deficit shrinks
The U.S. federal budget deficit shrank to nearly one-half its year-earlier size in January, to $27 billion from $50 billion. The projection for fiscal 2012 is for a $1.08 trillion gap between tax collections and outlays, according to the Congressional Budget Office. For fiscal 2011, which ended September 30, 2011, the U.S. budget deficit was $1.3 trillion.

Greek unemployment soars to 20.9%
The already weak Greek economy appears to have worsened under the pressure of government austerity measures, as Greece’s unemployment rate climbed to 20.9% in November, compared with 18.2% a month earlier. A year earlier, the unemployment rate was just 13.9%.

U.S. and global corporate news

U.S. Postal Service loss grows tenfold
The U.S. Postal Service saw its fiscal first-quarter loss deepen tenfold to $3.3 billion, as first-class mail revenue declined as a result of customers migrating increasingly to e-mail. USPS operating revenue fell 1.1% and operating expenses grew 1% while total mail volume fell 6%.

Rio Tinto takes delayed hit over Alcan acquisition
Anglo-Australian mining giant Rio Tinto reported a 59% decrease in profit for 2011 largely as a result of $9.29 billion in impairment charges resulting from the company’s $38 billion acquisition of Canadian aluminum company Alcan at the market’s peak in 2007. The deal burdened Rio Tinto with debt and forced it to sell businesses and cut costs. Excluding the impairment charge and other items, Rio Tinto’s annual profit grew by 11%.

Coca-Cola sales strong; quarterly profits down
Coca-Cola’s fourth-quarter earnings fell 71% from a year earlier when the world’s largest beverage company’s earnings were inflated by a large one-time gain. The company’s revenue rose 5.2% on 3% global volume growth. Coca-Cola’s North American sales were somewhat dampened by the challenging economy, and the stronger U.S. dollar has squeezed profit margins.

Daimler posts strong quarter, positive outlook
German auto giant Daimler reported a 63% increase in fourth-quarter profit on a 39% increase in earnings before interest and tax and a 10% rise in revenue. Daimler forecasts robust growth in vehicle sales for 2012, but modest earnings after investing heavily in new production facilities and a wider product lineup.

The week ahead

• The European Union releases its industrial production figures for January on Tuesday, February 14.
• Germany’s ZEW Survey is released on Tuesday, February 14.
• MetLife announces its earnings on Tuesday, February 14.
• Deere & Co. announces its earnings on Wednesday, February 15.
• The U.S. Department of Labor releases its monthly Producer Price Index on Thursday, February 16, and the Consumer Price Index on Friday, February 17.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report. Full holdings are also available on the individual Fund Profile tab in the Products and Performance section of mfs.com.

Past performance is no guarantee of future results.
Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com.
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Week in Review: Positive economic news propels markets

For the week ended February 3, 2012

• U.S. labor market grows at robust pace
• Manufacturing resilient in United States, China, India
• Eurozone composite guage shows slight growth
• Spain's economy shrinks; unemployment up
• Facebook creates buzz over announced IPO

A very strong U.S. labor market report Friday morning topped off what had been a moderately calm yet positive week for global financial markets. The U.S. private sector added more than one-quarter million jobs, and the nation’s unemployment rate fell to 8.3% from 8.5%. Other economic reports were largely positive and broad based, from a slight increase in overall eurozone manufacturing and services activity to reports of manufacturing growth in China, India, and Japan.

Other U.S. economic indicators were mixed, and the housing market continued to show weakness. A breakthrough is still pending in talks to complete a much-anticipated Greek bailout, which could be key to stemming the eurozone debt crisis. Eurozone finance ministers are to meet Monday and possibly seal the deal. Several corporate earnings reports showed substantial quarterly losses, while others, including those of giant oil companies, had mixed results.

U.S. and global economic news

U.S. adds 243,000 jobs in January
The U.S. economy added 243,000 jobs in January. Those jobs included a 257,000 gain in the private sector which countered losses in the public sector, the U.S. Department of Labor reported. The unemployment rate fell to 8.3% in January from 8.5% in December. The nonfarm payroll report showed that job growth was roughly twice as high as had been expected. On Wednesday, the January private sector jobs report, released by Automatic Data Processing (ADP), indicated that companies added 170,000 workers to their payrolls. Orders to U.S. factories rose 1.1% in December after rising 2.2% in November, the U.S. Department of Commerce reported.

U.S., Chinese, Indian manufacturing stays strong
Manufacturing activity improved in the United States, China, and India in January. The U.S. Institute for Supply Management’s index of overall activity climbed one point to 54.1 in January from December, and a measure of new orders rose 2.8 points to 57.6, indicating further growth ahead. The ISM U.S. non-manufacturing index also rose, to 56.8 in January from 53.0 the previous month. The Chinese government’s official gauge of manufacturing activity rose to 50.5 from 50.3, while a separate index from Markit Economics and HSBC Holdings edged up to 48.8 from 48.7. Markit/HSBC’s PMI for India jumped to 57.5 from 54.2 in December.

Eurozone economic activity edges up
A eurozone composite index of manufacturing and services activity rose to 50.4 in January from 48.3 in December, Markit Economics reported. Growth reached a seven-month peak in Germany and a five-month high in France, while Italy and Spain saw growth fall. Germany’s Ifo Institute’s business climate index rose to 108.3 in January from 107.3 in December.

Spain’s economy shrinks, unemployment jumps, but bond yields fall
Spain’s gross domestic product fell 0.3% in the fourth quarter from the third, the first decline in its GDP since climbing out of recession two years ago. The country’s jobless claims rose 4% in January from December, and only 7.3% of new contracts signed in January were for permanent work, indicating that further job losses are likely. However, the Spanish government’s bond sales on Thursday met with enthusiastic buyers. Average yields on bonds maturing in July 2015 and October 2016 dropped by about a half percentage point, to 2.861% and 3.455%, respectively; and yields on January 2017 bonds dropped close to two percentage points, to 3.565%.

Unemployment in Germany at two-decade low; up elsewhere in eurozone
German unemployment fell more than expected in January, to the two-decade low of 6.7%, from 6.8% in December, according to Germany’s Federal Labor Agency. December unemployment rates elsewhere in the eurozone, released by Eurostat, were higher: 22.9% in Spain, 13.6% in Portugal, 8.9% in Italy, 14.5% in Ireland, and 9.9% in France. The eurozone’s overall unemployment rate stood at 10.4% in December, a 14-year high.

Japan’s output rises 4% in December
Japanese industrial production rose 4% in December, according to the country’s Ministry of Economy, Trade, and Industry, benefiting from a recovery from the flooding in Thailand. Japan’s output of cars, mobile phones, and semiconductor manufacturing equipment all made gains.

Weekly U.S. jobless claims fall
Initial jobless claims by U.S. workers fell by 7,000 to 367,000 for the week ended January 28, the U.S. Labor Department reported. The four-week average decreased to 375,750 from 377,750.

U.S. economic signals mixed
Three consumer confidence indices posted mixed results. In January U.S. manufacturing grew at its fastest pace in seven months, according to the Institute for Supply Management, a trade group of purchasing managers. Its index rose to 54.1 from 53.1 in December. The Bloomberg Consumer Comfort Index rose to -44.8 in the period ended January 29, up from -46.4 the previous week. However, the Conference Board’s index of consumer confidence declined to 61.1 in January from 64.8 in December, far below the 68.0 expected by economists surveyed by Dow Jones Newswires.

U.S. home prices fall further
U.S. home prices showed further weakness in November, based on the Standard & Poor’s/Case-Shiller Home Price Indices. Both the 10-city and 20-city indices fell 1.3% from the previous month. The 10-city index dropped 3.6% from November 2010, and the 20-city gauge fell 3.7%.

U.S. and global corporate news

Facebook announces IPO plan
Facebook filed for a long-anticipated initial public offering that could value the ubiquitous social network at $75 billion to $100 billion. The IPO, which is set for sometime this spring, could dwarf the $1.9 billion raised by rival Google in 2004. Facebook hopes to raise up to $10 billion. It recorded a $1 billion profit last year on $3.71 billion in revenues.

AMR outlines job, pension cuts
American Airlines' parent AMR announced a plan to cut 13,000 jobs and terminate pensions in the hope of cutting $2 billion in costs annually. If the company terminates its four underfunded pension plans, it will be the largest pension default in U.S. history. Meanwhile, rivals Delta Air Lines and US Airways Group and private-equity firm TPG Capital are all reportedly considering takeovers or asset purchases.

Archer Daniels Midland’s earnings tumble
Agribusiness giant Archer Daniels Midland reported an 89% drop in fiscal second-quarter earnings because of weakness in three major business segments and a large write-down related to an Iowa facility.

Santander profit plummets
Spain’s Banco Santander, the eurozone’s largest bank by market value, said its fourth-quarter net earnings fell 98%. The banking giant took a €1.81 billion charge on its real estate holdings in Spain and wrote down goodwill on its Portuguese unit by €600 million.

UPS earnings drop on pension charge; outlook optimistic
United Parcel Service reported a 29% drop in quarterly earnings, largely because of a decision to change its pension-accounting method. However, UPS forecast a 2% to 3% increase in U. S. domestic package volume in 2012 and a 5% to 6% rise in international volume. For 2011, U.S. volume rose 0.9%, and international volume was 4.3% higher than a year earlier.

ExxonMobil profit edges up; Shell earnings decline
ExxonMobil, the world’s largest publicly traded oil company, reported a 1.6% increase in fourth-quarter earnings on higher crude oil prices. Revenue rose 16%. Results slightly beat expectations. Netherlands-based Royal Dutch Shell, Europe’s largest oil company, reported a slight decline in fourth-quarter net income from a year earlier as natural gas prices fell. The firm’s oil production was curbed by milder weather and maintenance at rigs in the Gulf of Mexico and the North Sea.

The week ahead

• Germany posts its January industrial production figures on Tuesday, February 7.
• UBS, Coca Cola, and Disney announce earnings on Tuesday, February 7.
• Weekly jobless claims are released by the U.S. Labor Department on Thursday, February 9.
• The U.K. releases its January industrial production data on Thursday, February 9.
• The University of Michigan announces its consumer sentiment report on Friday, February 10.
• France and Italy issue their January industrial production data on Friday, February 10.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report. Full holdings are also available on the individual Fund Profile tab in the Products and Performance section of mfs.com.

Past performance is no guarantee of future results.
Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com.
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Strategist's Corner

By James Swanson, CFA
MFS Chief Investment Strategist
February 3, 2012

Six observations for February

1. The US Federal Reserve Board has spoken. It is certainly not that at ease with the strength of the current business cycle in the United States. It has announced it will keep interest rates low until 2014. Originally, the Fed had announced that a low-rate regime would last until 2013. But it now stands ready to keep short-term rates low for longer and to enact a third round of quantitative easing to buy long-term bonds. By implication, the Fed is supporting long-term and even risky assets, but its real goal is to stimulate job growth and perhaps to stabilize the housing market.
2. Europe's slowdown or imminent recession seems contained at this point. It is evident at the beginning of 2012 that the peripheral European countries are showing negative growth or contraction. However, parts of Europe, namely Germany and France, seem to be holding up rather well. We are certainly not witnessing the type of production cuts or rapid deceleration in overall growth that we saw during the financial crisis of 2008. Importantly, initial industrial indices turned up in late 2011, and the weakness of the euro seems to be boosting the exports of Germany, Europe's largest economy. Assets, which are now pricing in a European recession, may be poised to rally if Europe sidesteps the expected recession and bank failures.
   
3. Everyone has been looking to the European Central Bank (ECB) to pull out the big guns and unveil a US-style TARP (Troubled Asset Relief Program)-like program to shore up the European banking system and to prevent a widespread credit crisis. The ECB has disappointed, however, and has taken a series of half-measures that have helped to hold the euro together. The ECB has deployed medium- and long-term asset programs that were not highly heralded but seem to have effectively moderated the borrowing costs in some of these countries and in effect blunted the risk of owning peripheral country bonds for European banks. It seems eurozone leaders are intent on holding things together, albeit without a major fix to the underlying crisis.
4. The US economy - amid its initial signs of acceleration - stands out among many other regions of the world that are slowing and even faltering at the outset of 2012. In the United States fourth-quarter numbers showed improvement over those of the previous three quarters of 2011. The pace of production has quickened. Inventory-to-sales ratios are low; retail consumption is holding up; and gas prices are stable and at this point don't present a threat to consumer spending. While the US economy seems to be in good shape, we are likely to witness a slower pace of growth in the first and second quarters. I say this because we saw significant growth in the fourth quarter of 2011, and while a lot of that growth was organic, some of it was pent-up demand that stemmed from the supply disruption after the Japanese earthquake and tsunami.
5. As far as earnings go, we are coming to the halfway point in the fourth-quarter earnings reporting season. The bottom line is that earnings across the board will probably be comparable with third-quarter earnings. Even though those third-quarter earnings hit records, it is still disappointing that fourth-quarter results aren't better because the fourth quarter is usually the strongest of the year. It doesn’t look like that will be the case this year. Some of this weakening results from a transatlantic transmission mechanism. Sales to Europe and to emerging markets, which have also been affected by Europe, are slower. There is a slowdown in growth in the EM countries and certainly a downward trajectory in Europe. That slowing is affecting the top-line sales of big US multinationals that trade in Europe. It is certainly not a disaster, and in many sectors there have been very good positive surprises. Markets have already priced in a quarter that will not break records.
6. So, what does all this mean for asset allocation? Again, we are likely to experience a muddle-through, but not a negative, period. The expansion is continuing, and it now has the support of the Fed. From a historical point of view, spreads are wide. At the same time, companies have high liquidity levels and pretty good profits. So credit markets are likely to be a good place to invest. The forward price/earnings ratio of the US stock market is a little better than 12x earnings. The increasing dividend payout now seems to be supported by the Fed's two-year policy of low rates. It is clear that the slowdown in Europe is affecting the large Standard & Poor's companies, but smaller and mid-cap companies, which sell more within the United States, are still experiencing sales and margin growth. One bright spot in this earnings season, among the various sectors of the market, is technology. Many software providers and tech-oriented companies have surprised Wall Street with earnings on the upside of forward estimates.

It is notable that the US economy is growing a bit faster, while many world economies are slowing. It is also interesting to note that US corporate growth and consumer spending, while not moving forward at the torrid pace of the 1980s and 1990s, are moving ahead without added debt. There is no debt expansion relative to total assets on company balance sheets, and the consumer debt load is being whittled away. That decreased debt load is resulting in a consumer much more able to service remaining debt. This strikes me as a much more sustainable and organic expansion, albeit running at a slower pace than normal. This expansion does not suffer from the risky "juiced" effects of leverage. In my view that makes the expansion more durable and able to withstand the painful effects of a possible credit contraction down the road.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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