I think the stock market has run way, way ahead of the economy. Too far ahead. Whereas a month ago every bit of news was seen through the darkest glass possible, today everybody is going gaga over the slightest sign that things aren’t getting bad as quickly as they were in January. One result has been a strong rally in the price of oil that just isn’t justified by the economic data. For example: the spot price of Brent crude has climbed 25% in a month. With everybody from the Federal Reserve to the Organisation for Economic Cooperation and Development getting more pessimistic about when the recovery will arrive (as I write this is in July they are saying 2010) and how strong it will be (not very), I think oil prices are due to retrace a good part of that gain. That means oil stocks, especially those that have moved up most strongly, are facing a correction, too. Share of Petrobras (PBR) have climbed 137% since the Nov. 20 market low and 33% since the March 9 low. As much as I like the long-term prospects for Petrobras, I think the process of turning those prospects into oil is going to take so much capital and so much time that right now it’s priced into the stock. My target price on these shares is $41 by December, and at a current price near $36 a share, I just don’t see the upside in holding right now. So I’m going to sell these shares with an eye to re-establishing a position in the mid-$20s when this rally falters. I’m selling these shares with a 32% loss since I added them to Jubak’s Picks in my own excess of enthusiasm on Aug. 26, 2008. (Full disclosure: I will sell my personal position in Petrobras three days after this column is posted.)
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