What to watch for as US earnings news rolls in

Trading has been dominated for months by speculation about news events: Washington's perpetual state of gridlock, the impact of Superstorm Sandy on the Northeast, 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 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 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 (on Wednesday) and 3M (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 4 1/2 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 rising 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 an earnings call with analysts last week, Citigroup 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.

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