Here comes the rain again

There is a resurgence of negative news building in the US housing market of late: housing starts are at an all-time low and yet home vacancy rates are rising. Meanwhile as at July 1st, 24 % of sellers on the market had cut their asking price at least once, as compared with 15% who had reported doing so from the previous month.
See CNBC: Home sellers slashing prices, while banks mow the lawn.
Various forces are at work here no doubt as the number of households continues to shrink and more and more empty and foreclosed properties are moved back on to the sale and rental markets. Home prices are setting up here for the next leg down. An interesting sidebar to all of this, is a recent Economist study which finds US realty is now at relatively better valuations (11% over-valued) than many other western countries (Canada 23% over-valued, UK and France 30%, Spain 50%) where home prices have not yet corrected enough to grind down bubble prices. If US homes correct another 10-15%, buyers who have cash or can access financing, may find housing at the most attractive valuations in more than a decade. See Economist: Froth and Stagnation
Meanwhile we note that the Chinese Manufacturing PMI which has been falling from 57 in January 2010 touched 50 in June. Below 50 denotes negative growth in this sector and the last time this index broke below 50 was August 2008 just as global stock markets plunged and the recession went global. Indeed of the G7 countries, 5 domestic PMI indexes fell last month. Germany's index was unchanged and Italy's rose slightly. And in addition to China the Taiwan, Singapore, and India metrics have also fallen in recent data. This time may well be different, but at the very least, this is another indication that global growth is in the midst of a significant downshift again heading into the second half. See: Is there a global economic slowdown in the works?
All the while stock analysts are showing their notoriously bullish bias with a 2010 earnings consensus of $82 operating EPS and a never-before-in-history target of $96 for 2011 (which is even higher than the credit-bubble peak earnings of $94 a share in 2007, and lets not forget that 40% of the 2007 record earnings came from US financials who are no longer free to run wild). In fact analyst consensus is now forecasting more than 21% earnings growth for the median stock over the next year- a record level in the 30 years of data. Ok, maybe this time they will be accurate in their forecasts. But the record for their forecasts over-shooting reality is infamous especially at turning points.
Most often lofty earnings expectations have been a positive precursor to poor stock market performance once reality comes in to deflate expectations. Indeed a study by Ned Davis Research concludes that stock returns are usually quite weak beginning from periods with high earnings expectations. As an example, the stock market has risen 18% on an annualized basis when earnings expectations are below 5%. However when expectations rise above 15 percent (like now), annualized total returns have averaged -12%. For a summary of this study and excellent charts see: See: Wall Street Earnings Expectations Ignore Earnings Divergences.