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Consumers have been quick to ratchet up their debt to match higher housing prices and the banks so far have been willing to comply. Nearly half of all Toronto’s mortgages are now considered high-ratio, meaning loan-to-incomes greater than 45 per cent, while Vancouver and Calgary are not far behind at approximately 40 per cent and 35 per cent, respectively.

To add some further perspective, Canadian consumer debt levels are approaching the entire market capitalization of the S&P TSX. Think about that.

In regards to diversification, Canada is as close as you can get to being a one-trick pony with financials, energy and materials representing over 67 per cent of the S&P TSX. Therefore as an investor, one should ask if these sectors can deliver over the next 12 months given the current environment.

In regards to energy, we think the biggest gains are behind us as we adjust to an oil price environment that is range-bound with OPEC defending it at any level below US$45 a barrel and U.S. shale producers providing a ceiling by quickly responding to prices above $55 a barrel. Capital is also leaving the Western Canadian Sedimentary Basin and being redeployed in more attractive operating environments such as the Permian Basin or Marcellus Shale therefore making it a lot more challenging to grow north of the 49th.

In regards to the banks, which account for approximately 23 per cent of the TSX, we don’t worry about a fallout from the ongoing situation with Home Capital Group Inc. and the subprime market which is quite small. However, we do have our concerns about their ability to repeat the earnings growth of the past should the housing market top out or worse, roll over.