Week in Review: 2010 ends quietly as investors hope stocks continue bullish ways in 2011

Global economic news

Confidence of American consumers drops slightly in December
The Conference Board's Consumer Confidence Index unexpectedly fell to 52.5 in December from a revised 54.3 in November. The New York-based research group said lackluster economic growth and a pessimistic jobs outlook are largely to blame for the drop. The median forecast for U.S. consumer confidence, based on a survey of 61 economists, had projected confidence would rise to 56.3.


Italian business confidence hits 34-month high
The Isae institute's manufacturing-sentiment index, which measures Italian business confidence, climbed to 103 in December, from a revised 101.7 in November. The latest figure, the highest level for the index in almost three years, indicates increasing optimism about economic recovery in the region.


Initial U.S. jobless claims at lowest level since July 2008
The U.S. Department of Labor reported that the number of initial jobless claims filed fell to 388,000 in the week ended December 25, down 34,000 from an upwardly revised 422,000 claims the previous week. It is the first time in over two years that the number of Americans filing new unemployment claims fell below the 400,000 level.


Pace of German inflation accelerates in December
The inflation rate in Germany increased to 1.9% in December from 1.6% in November, according to the Federal Statistics Office in Wiesbaden. That is the highest rate since October 2008 and higher than the rate expected by economists who had projected an unchanged reading. Consumer prices jumped 1.2% from November, the biggest monthly gain since December 2002.


U.S. home prices tumble in October, third straight month-over-month drop
The Standard & Poor's/Case-Shiller Home Price Indices, a broad gauge of U.S. home prices, fell 1.3% in October from a month earlier. The October drop in prices represents an annualized decline of 15%. Prices in 20 major U.S. metropolitan areas were down 0.8% from October 2009, the biggest year-over-year decline since December 2009. Many economists project that the declines will continue into at least next spring.


French economy expands; pace of growth slows from previous quarter
The Paris-based statistics office Insee reported that France's gross domestic product rose 0.3% in the third quarter, down from a 0.6% gain in the second quarter.


European retail sales grow at fastest pace since May 2008
A gauge of European retail sales increased to 52.9 in December from 51.3 in November, London-based Markit Economics reported on its Web site. The index, which is at its highest level since May 2008, is based on a survey of more than 1,000 executives. A reading above 50 indicates expansion.

Global corporate news

Cal-Maine Foods reported that its profit for the fiscal second quarter ended November 27 was $15.2 million, down from $16.1 million a year earlier. This represents a 5.6% drop in earnings for the largest U.S. producer and distributor of fresh-shell eggs. The company cited higher feed costs for the earnings decline.


BJ's Wholesale Club reportedly hired investment bank Morgan Stanley to conduct an auction of the chain after receiving an unsolicited bid from Leonard Green & Partners LP earlier this year. But if the retailer does not move forward with the auction soon, Leonard Green, the Los Angeles private equity firm that bought 9.5% of the chain last summer, could launch a hostile takeover bid. Some analysts have estimated that BJ's could sell for as much as $3 billion at auction.


Groupon, the Chicago online discount coupon site that earlier this month turned down a $6 billion takeover bid from Google, has filed to raise up to $950 million from the sale of preferred stock. Andrew Mason, Groupon's chief executive, is raising money as he considers an initial public offering in 2011. This would be the biggest round of equity financing since Pixar sought approximately $500 million in 1995.

The week ahead

• Estonia joins eurozone, France assumes presidency of the G-8 and G-20, and Hungary assumes the EU presidency effective Saturday, January 1
• U.S. construction spending report released Monday, January 3
• Biglari Holdings, Lennar earnings released Monday, January 3
• U.S. factory orders report released Tuesday, January 4
• ISM Non-Manufacturing Index released Wednesday, January 5
• Novartis, Ruby Tuesday earnings released Wednesday, January 5
• Monsanto, Penfold earnings released Thursday, January 6
• U.S. consumer credit report released Friday, January 7 

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

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. In addition to providing a 13-month extension of benefits for the long-term unemployed, the legislation includes a long-anticipated extension of the "Bush tax cuts" that were scheduled to expire on January 1, 2011. Other significant provisions include a new alternative minimum tax (AMT) "patch," a major modification of the estate tax, and a new 1-year 2% employee Social Security payroll tax reduction.

Income tax rates

The Act extends existing federal income tax rates for 2 additional years. As in 2010, the federal tax bracket rates for 2011 and 2012 will be 10%, 15%, 25%, 28%, 33%, and 35%. (Without this legislation, federal income tax rates would have increased beginning in 2011--the current 10% federal income tax bracket would have disappeared, and the five remaining tax brackets would have been 15%, 28%, 31%, 36%, and 39.6%.)

Tax rates for long-term capital gain and qualifying dividends

Existing tax rates for long-term capital gains and qualifying dividends are also extended through 2012. As a result, long-term capital gain and qualifying dividends will continue to be taxed at a maximum rate of 15%. For individuals in the 10% or 15% marginal income tax bracket, a special 0% rate will generally continue to apply.

Alternative minimum tax (AMT)

The Act includes another temporary "patch" for the AMT--this one good for 2010 and 2011. AMT exemption amounts are slightly increased, and personal nonrefundable tax credits will be allowed to offset AMT liability through 2011.

AMT exemption amounts	2010	2011
Married filing jointly	$72,450	$74,450
Single or head of household	$47,450	$48,450
Married filing separately	$36,225	$37,225

Estate tax

The Act makes several major-- though temporary-- changes to the federal estate tax, including:

• For 2011 and 2012, the estate tax exemption amount (the applicable exclusion amount) will be $5 million per person (the $5 million will be indexed for inflation in 2012); the top estate and gift tax rate for these years will be 35%
• The $5 million exemption amount and 35% top estate tax rate will apply retroactively to 2010 as well, but for individuals who died in 2010, an election can be made to choose the estate tax provisions effective prior to this legislation (i.e., no estate tax, but modified carryover basis rules); an extended due date is provided for individuals who died on or after January 1, 2010, but before December 17, 2010.
• Beginning in 2011, the gift tax (reunified with the estate tax) will have a $5 million dollar exemption amount; the generation-skipping transfer tax, with a $5 million exemption effective January 1, 2010, will have a 0% tax rate for 2010, and a 35% rate for 2011 and 2012
• For 2011 and 2012, when one spouse dies, any unused portion of that spouse's estate tax exemption amount may be transferred to the surviving spouse

One-year reduction in employee payroll tax

For the 2011 year, the employee portion of the Social Security retirement component of FICA employment tax is reduced by 2%. Normally equal to 6.2% of covered wages up to the taxable wage base ($106,800 in 2011), for 2011 this rate will be reduced to 4.2%. Self-employed individuals, who normally pay 12.4% for the Social Security portion of their self-employment taxes, will also benefit from a 2% reduction, paying the tax at a rate of 10.4% for 2011.

"Bonus" depreciation

The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 allowed an additional 50% depreciation deduction for qualifying property placed in service during 2008 and 2009. This additional depreciation deduction was allowed for purposes of the alternative minimum tax (AMT) calculation, as well as regular tax. The Small Business Jobs Act extended the 50% additional first-year depreciation deduction for one year to apply to qualified property acquired and placed in service during 2010.

This Act increases the bonus depreciation percentage to 100% for property acquired and placed in service after September 8, 2010 and before January 1, 2012. The Act extends bonus depreciation at the 50% level through 2012 (50% bonus depreciation will apply for property placed in service after December 31, 2011, and before January 1, 2013).

IRC Section 179 expense limits

Section 179 of the Internal Revenue Code allows businesses to elect to deduct the cost of depreciable tangible personal property acquired for use in the business in the year of purchase, rather than through depreciation deductions. Since 2003, several pieces of legislation have temporarily expanded the limits that apply to Section 179.

Most recently, the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 increased the maximum amount that can be expensed to $250,000 for tax years beginning in 2008 and 2009. This amount was reduced by the amount by which the cost of qualifying property placed in service during the year exceeded $800,000. For tax years 2010 and 2011, the Small Business Jobs Act increased the maximum amount that may be expensed under Section 179 to $500,000 and increased the phase-out threshold amount to $2 million.

For 2012, the dollar limit amount and phase-out threshold level were scheduled to drop to $25,000 and $200,000, respectively. This Act sets the IRC Section 179 expense limit for 2012 at its 2007 level--$125,000, with a phase-out threshold of $500,000--indexed for inflation.

Small business stock exclusion

Noncorporate investors may generally exclude 50% of any capital gain from the sale or exchange of qualified small business stock (generally, stock issued by domestic C corporations whose assets do not exceed $50 million) issued after August 10, 1993 (if a five-year holding period requirement and other requirements are met). The Small Business Jobs Act temporarily increased the exclusion percentage for qualified small business stock acquired during 2010 to 100%, and does not treat the excluded gain as an alternative minimum tax preference. Therefore, no regular tax or alternative minimum tax is imposed on the sale of qualified small business stock issued and acquired after September 27, 2010, and before January 1, 2011, and held at least five years.

This Act extends the 100% exclusion for one year--to qualifying stock acquired before January 1, 2012, and held for more than five years.

Education provisions

• The Act extends the American Opportunity tax credit (known as the Hope tax credit before being significantly-- though temporarily--modified by the American Recovery and Reinvestment Act of 2009). The American Opportunity Tax Credit's higher maximum credit amount, increased income limits, expanded applicability to the first four years of college, and potential refundability, available in 2009 and 2010, are extended through 2012.
• The current rules that apply to Coverdell Education Savings Accounts (e.g., $2,000 annual contribution limit, education expenses expanded to include elementary and secondary school expenses) are also extended through 2012. Without this change, the annual contribution limit would have dropped to $500 beginning January 1, 2011.
• For the student loan interest deduction, increased income limits and the suspension of the 60-month rule, which would have expired at the end of 2010, are extended for 2 years (the deduction was, prior to 2001, limited to interest paid in the first 60 months of repayment).
• The deduction for qualified higher education expenses, which expired at the end of 2009, is retroactively reinstated for 2010, and extended through 2011.

Other provisions--individuals

Provisions extended through 2012 include:

• Itemized deductions and personal and dependency exemptions will not be reduced for higher-income individuals
• "Marriage penalty" relief in the form of an expanded 15% tax bracket and an increased standard deduction amount for married individuals filing jointly
• Exclusion of up to $5,250 in employer-provided education assistance for undergraduate and graduate education
• Increased earned income tax credit (EITC) for families with 3 or more children, and increased EITC income limits for married couples filing jointly
• Increased child tax credit amount with expanded refundability (15% of earnings above $3,000)
• Expanded credit for child and dependent care expenses (increased limit on eligible expenses and maximum credit percentage)
• An increased adoption tax credit and employer-paid adoption assistance exclusion amount; the credit also remains refundable

Provisions retroactively reinstated for 2010 and extended through 2011 include:

• The deduction for state and local sales tax in lieu of state and local income tax on Schedule A
• The $250 above-the-line deduction for elementary school and secondary schoolteacher classroom expenses
• Increased contribution limits and carryforward period for contributions of capital gain property for conservation purposes
• Tax-free distributions to charitable organizations from IRAs by individuals age 70 1/2 or older (up to $100,000 per year); a special provision in the Act allows qualifying individuals to treat a distribution made from an IRA to a charity in January, 2011, as if it were made in 2010

Provisions extended for one year (through 2011):

• Increased monthly exclusion amount for employer-provided transit and vanpool benefits
• Mortgage insurance premiums deductible as qualified residence interest, subject to an adjusted gross income (AGI) limitation

The Act also reinstates the tax credit for energy-efficient improvements to existing homes for 2011, but as it applied prior to the American Recovery and Reinvestment Act of 2009 (e.g., a 10% credit rate generally applies).

Other provisions--businesses

Provisions extended through 2011 include:

• Research and development credit
• Indian employment credit
• New Markets tax credit
• Employer wage credit for activated military reservists
• Enhanced charitable deductions for contributions of food inventory, book inventories, and computer equipment
• Work opportunity tax credit

--see disclaimer below--