Wall Street's Week Ahead: Earnings, Housing and the China Question

Wall Street China EconomyBy DANIEL WAGNER

With fourth-quarter earnings seasons hitting its stride, investors are returning to the familiar comfort of cold, hard numbers -- the press releases, conference calls and spreadsheets that provide a real view of corporate America's performance.

Trading has been dominated for months by speculation about news events: Washington's perpetual state of gridlock, the impact of Superstorm Sandy, the international economic slowdown. Earnings give professional market-watchers something tangible to analyze.

"A lot of people like to trade around earnings because there are a lot of short-term opportunities there," says Randy Frederick, managing director of active trading and derivatives at Charles Schwab. "We're just starting to get into earnings in a big way this week, so there are plenty of ways to do that."

This week will bring answers to questions that have hung over the market for months: Will slower growth in China put a dent in big U.S. companies' income? Will new housing numbers come in strong enough to keep homebuilders flying high? How much did Superstorm Sandy cost big insurers?

Here's a guide to some of the big stories that professional investors will be watching as the earnings news arrives:

THE CHINA QUESTION: Big U.S. companies are increasingly reliant on sales to China, and growth there appears to be slowing. This round of earnings will shed light on how hard the slowdown is hitting American companies.

The messages so far are mixed. When Alcoa (AA) announced its results on Jan. 8, executives said they expect sales to grow by 7 to 10 percent in 2013, thanks to "the wealthier middle class" and "the general uptick in the Chinese economy."

Announcing its fiscal second quarter results last month, however, Nike (NKE) said China was the only region where revenue declined. Executives said they expect lower income from China in the coming quarters as they work to build a strategy around Chinese consumers.

"You've got to look at what these companies are seeing in Asian markets," says John Butters, senior earnings analyst at FactSet, a research and data firm. "There seems to be an expectation of improvement in China as we progress through 2013," he said. Traders will learn more from earnings announcements by companies like McDonald's (MCD) on Wednesday and 3M (MMM) on Thursday.

In 2011, 3M generated 41 percent of its operating income in the Asia Pacific region, compared with 26 percent in the U.S. McDonald's generated 22 percent of its revenue in the region that includes Asia, compared with 32 percent in the U.S.

HOUSING RALLY: HOW LONG? The government said Thursday that U.S. builders started work on homes in December at the fastest pace in 4½ years, and that last year was the best year for residential construction since the early stages of the housing crisis.

It was the latest announcement to lift homebuilder stocks, which have been on a tear as evidence mounts that the housing market has finally regained some momentum. Homebuilders in the Standard & Poor's 500 index have shot up 23 percent since their recent low on Nov. 14. Already this month, seven homebuilders have hit 52-week highs on heavy trading volume.

Yet some have been reluctant to trust the turnaround in the housing market. In an earnings call with analysts last week, Citigroup (C) Chief Financial Officer John Gerspach said his bank won't start to release billions in reserves held against mortgage losses until it's clear that the trend is sustainable.

This week brings more data on sales of new and existing homes in December. If the numbers look weak, analysts say, homebuilder stocks may appear overbid and the rally may pause until earnings results arrive from big players like D.R. Horton (DHI) on Jan. 29 and PulteGroup (PHM) on Jan. 31.

HOW SUPER WAS SANDY? Superstorm Sandy had broad, negative economic effects, like keeping holiday shoppers home and wiping out disposable income. But its most direct impact was on insurers. Risk modeling firm AIR Worldwide says storm-related losses covered by insurers could total $16 billion to $22 billion.

This quarter's earnings will give traders their first look at how hard Sandy hit the major property and casualty insurance companies. Analysts have been reducing their expectations for the financial industry's performance mainly because of insurers, Butters said.

Reporting on Friday, auto insurer Progressive Corp. (PGR) said Sandy cost it about $15 million in December, contributing to a decline in net income of 3 percent from the same quarter a year earlier.

The Travelers Cos. (TRV), one of the 30 stocks in the Dow Jones industrial average, reports its results on Tuesday. ACE Ltd. (ACE) reports on Jan. 29.

TECH TROUBLE: Tech companies have been vocal about the challenges they face. Of the 32 tech companies that gave earlier guidance about their fourth-quarter performance, more than 90 percent were negative, Butters says. The usual number is closer to 50 percent, he said.

One troubling sign Thursday was Intel's (INTC) announcement that weak demand for personal computers caused its fourth-quarter net income to fall 27 percent and its revenue to decline 3 percent. Intel also predicted a low single-digit percentage increase in revenue this year.

The tech portion of the S&P 500 has relied on Apple (AAPL) for its growth in recent quarters. But many analysts expect Apple to post its first year-over-year decline in quarterly earnings since 2003 when it reports on Wednesday. That's a big reason why analysts expect tech to be the second-worst performing sector of the 10 industry groups in the S&P 500, Butters says. They expect an industry-wide decline in earnings of 3 percent.

For Apple, it will be "a pivotal quarter," says Kevin Pleinis, equity market analyst at Birinyi Associates, a stock market research and money management firm. Apple's stock has lost 29 percent of its value since closing at a record $702.10 on Sept. 19. The sell-off was based on vague news reports about demand for iPhones and possible new product introductions, Pleinis says.

"It will be interesting to see if the fundamentals of Apple still stack up," he says.


Increase your money and finance knowledge from home

Investing in Emerging Markets

Learn to invest in a globalized world.

View Course »

Investing in Real Estate

Learn the basics of investing in real estate.

View Course »

Add a Comment

*0 / 3000 Character Maximum

5 Comments

Filter by:
coochiescooter

Barack is too chummy with the Chinese

January 22 2013 at 3:28 AM Report abuse -1 rate up rate down Reply
1 reply to coochiescooter's comment
mitch rochelle

really.? but i bet mitt is on a first name bais with the goverment there......mitt sends so many jobs there.soon there will be none left here.......

January 22 2013 at 4:39 AM Report abuse rate up rate down Reply
AL CONFER

The American Congress allowed jobs to be outsourced and actually gave tax incentives to these very same companies most notably China. Of course India, Viet Nam, Pakistan and Mexico benefited greatly. China has been permitted for years to maniplate their currency to make their products cheaper, and all on the backs of the American worker and Obama also allowed China to continue to manipulate their currency, when China should have been stopped, and noted as a preditor nation. Wal-Mart has stated they would create 100.000 American jobs over the next ten years, and purchase $50.000.000.000 dollars in American goods while last year alone, Wal-Mart made $444.000.000.000 in profits. Wal-Mart makes it sound like a big deal and it is no big deal, it's a joke. Quit buying anything from Wal-Mart as it is just a ploy to make Americans think Wal-Mart is a good guy when the reality is, it's a cheap shot. American jobs has to come back and no tax cuts to any American Company that invests overseas. Total insanity.

January 22 2013 at 1:51 AM Report abuse rate up rate down Reply
roanbadger

Just read an article today on the housing market in Florida. 20% of the homes being bought or built are being bought by South Americans, Carribeans, and Canadians. Investing their money and then renting out the property. 82% of them are paying cash and were averaging $194,000 on a house purchase. They also are buying ranches and dormant land.

January 22 2013 at 12:23 AM Report abuse rate up rate down Reply
cpo1514

Is the picture with the Chinese flag actually honoring the inauguration today or just thanking the USA (Imelt and The Organizer) for the jobs for the next four years?

January 21 2013 at 8:08 AM Report abuse -3 rate up rate down Reply