The ML forecast of a marked slowing in U.S. consumer spending growth dominantly accounts for a projected decline in Canadian GDP growth from +3.0 pct average over three years to just +2.1 pct in 2007. They believe that weaker U.S. demand will affect Canada's auto-heavy, export-oriented manufacturing sector.

For the Big 6 Canadian banks, ML projects +8 pct earnings growth in 2007, which is a significant slowing from the average of the past five years, due to: (1) "provisions for credit losses as a percentage of loans have declined -79 pct over that period, and are at the very least likely to flat line" and (2) The Toronto Exchange index grew by an average +18 pct per year in the last four years (vs. +15 pct for the U.S.), which in both cases is unsustainable, they say.

They also opine that Canadian banks are trading at historically high valuations that cannot be sustained.

Download ML Dec 14 review of Canadian banks

ML rates TD Bank (TD) as their only Buy-rated Canadian bank, and have a 12-month Price Target of $74. TD trades at 12.6 times ML's 2007 estimated earnings per share, compared to 13.1 times for the other Canadian banks, in spite of having, they say, the highest outlook for earnings growth in 2007 and 2008, and lessened acquisition risk.

Clearly, these are not signs that the Bull market in Canada is expected to continue through the next six months.