The crosscurrents in this market are enough to give you a headache.

May I suggest that you take two stock markets—those of Mexico and Canada—and call me in the morning?

If you look just at the U.S. stock market what you see is a confusing mix of short-term strength and long-term weakness. And you are left wondering, day-to-day, which time horizon investors will choose to emphasize.

On the strength side, the U.S. economy is growing faster than any other economy in the developed world. The year-to-year growth of 2.8% in the fourth quarter looks great when you compare it to a stagnant Japan and a Europe that’s headed toward a recession in 2012.

But, on the weakness side, as Standard & Poor’s was so kind to remind investors on February 8, the United States still hasn’t begun to deal with its current budget deficit or the long-term trends feeding that deficit. The credit-rating company, which downgraded the United States to AA+ from AAA on August 5, warned that the United States faces a one-in-three chance of another downgrade within the next six to 24 months.

Strength side again–the Dow Jones Industrial average is flirting with its May 2008 high, and is within a 10% rally of its all-time high of 14,164.53 set on October 9, 2007—when Lehman Brothers still existed and the government didn’t own a piece of either General Motors (GM) or American International Group (AIG).

Weakness? But the U.S. dollar, which looked so strong just a month ago, has fallen to a three-month low. Since its peak on January 13 the dollar had tumbled 3.7% by February 8 against a basket of currencies that includes the euro, the yen, the pound, the Canadian dollar, the Swedish krona, and the Swiss franc.

Now I’m not going to suggest that putting your money—or some of your money anyway—into Canadian and Mexican stocks is going to eliminate this conflict—or eliminate the risk that goes with it.

But I would suggest that buying Canadian and Mexican stocks right now is a good way to get most of the good effects of U.S. economic growth while avoiding the bad effects of a falling dollar. In fact, if the dollar does continue to slide, you might even pick up some extra gains from the appreciation of the Canadian loonie and the Mexican peso.

See whether this strategy makes any sense to you.  Read more

On Wednesday, January 25, the U.S. Federal Reserve said it would keep interest rates at their current exceptionally low level until the end of 2014. Forget about the middle of 2013, which seemed extremely far away when the Fed made that “guarantee” in August. And forget about the beginning or middle of 2014. Now the Fed is talking about the end of 2014.

Almost three years from now. Three years with short-term interest rates near 0%.

Let’s cut straight to the chase for investors: Who wins and who loses from this extraordinary statement of policy by the U.S. central bank? Read more

At the moment U.S. Treasuries are the safe haven of choice.

And so, strange as it may seem, is the U.S. dollar.

Let’s take the currency piece of this first. The U.S. dollar is up against strong currencies such as the Canadian and Australian dollar, and the Swiss franc. The logic on the Canadian and Australian currencies is that a slowing global economy will hurt these commodity-exporting economies enough to end any prospect of interest rate increases. In the case of the Swiss franc the concern seems to be that the Swiss central bank has decided to intervene to weaken the currency in order to save the country’s exporters from further pain.

The dollar is still expected to decline by the end of the year with Wall Street investment strategists surveyed by Bloomberg predicting a 1% decline in the currency in the fourth quarter. But that’s a huge shift from the results of Bloomberg’s July 12 survey when strategists were projecting a 2% decline.

In the bond market, U.S. Treasuries remain the favorite bet of investors fleeing volatility in global financial markets. The Federal Reserve’s promise last week to keep interest rates at their current extraordinarily low levels through 2013 was an open invitation to use Treasuries as a shelter from risk. After all, the Fed’s statement removed any risk to Treasuries from an increase in interest rates.

Last week Treasury prices rose and yields on the 10-year Treasury fell to a record low of 2.0346% on August 9. Even the U.S. Treasury’s auction of $72 billion in notes and bonds wasn’t enough to move yields significantly higher.

The next event that has the power to change the balance in the currency and bond markets is the Tuesday, August 16, meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel. Topic A, B and C will be how to stabilize the euro and European financial markets. Last week France, Spain, Italy, and Belgium all imposed bans on short selling. Such a ban smacks of panic and while the markets may welcome any stability the move brought to shares of hard-hit European banks, investors are now looking for some assurance that the ban is only a temporary measure set to be replaced by a long-term plan for the euro.

Watch the dollar if you want to know where stocks are headed

I hate to sound like a broken record but the strength or weakness of the U.S. dollar remains the big driver in global stock and commodity prices.

When the dollar is up, commodity prices fall and the prices of commodity stocks follow. That pushes down share prices in economies with big commodity exposure, such as Brazil. And the strength of the dollar right now correlates very strongly with weakness in emerging markets too.

The question this week as it has been for the last few weeks is how long that strength in the dollar will last. Read more

Climbing German inflation assures more interest rate increases for the Eurozone and a appreciating euro

If you were wondering if the European Central Bank was likely to go soft on inflation and put its interest rate increases on hold, wonder no more.

According to numbers released today, April 28, Germany’s annual inflation rate climbed to 2.6% in April. That’s up from 2.3% in March and marks the fastest pace for German inflation in more than two years.

The European Central Bank isn’t about to let inflation climb this fast in the core economy of the European Monetary Union and the one politically most sensitive to inflation. April inflation data for the Eurozone as a whole will be released tomorrow, April 29. It’s expected that the numbers will show inflation steady at last month’s 2.9% annual rate. That’s well above the central bank’s inflation target of close to but not above 2%.

Now the only question is when the bank next raises its benchmark interest rate. Read more