Longer Drilling Contracts Favor Transocean

A stock we own that I have mentioned in the past is Transocean (RIG - commentary - Cramer's Take). It's very strong today -- up more than $6 to around $151.50 The strength is likely due to an announcement by SeaDrill, a Norwegian company, regarding some new contracts. SeaDrill will deliver three new-build sixth-generation semisubmersible rigs for Petrobras' (PBR - commentary - Cramer's Take) use offshore Brazil. The start dates are first-quarter 2009 and second-quarter 2010, at a record average rate of $630,000 a day. The rate is remarkable; of equal importance is the six-year contract term for the rigs.

Transocean dominates the deepwater drilling market, with more deepwater rigs than any other player. The length of SeaDrill's new contracts spells good things for RIG, as the company has the ability to sign its rigs at the same sort of rates. Estimates will probably go up for the outer years. Long RIG

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GE Was Just a Hiccup in the Recovery
Posted at 8:53 AM EDT

The Economist figures the U.S. economic slowdown could be shallow due to the unprecedented activism of monetary and fiscal authorities. Lower interest rates, innovative Fed auctions, tax rebates (I'm not so sure about this one), and the safety net that was extended to investment banks are all going to help curtail the downturn.

James Cooper of Business Week suggests in its latest issue that the loss of jobs won't be too bad this go-around since the pace of hiring after the last recession was the slowest on record. He notes that job creation the last six years was only 80,000 per month on average, which is "by far the slowest pace of job growth in any of the 11 post-recession periods since World War II." This could indicate that payrolls are lean to begin with and that there won't be too much cutting.

GE (GE - commentary - Cramer's Take) sure took the wind out of the markets' sails last week, however, and just when we were getting some good news too. Wal-Mart (WMT - commentary - Cramer's Take) raised its guidance; Washington Mutual (WM - commentary - Cramer's Take) got a huge infusion of cash; the head of Goldman Sachs (GS - commentary - Cramer's Take) said he thought we were a good bit of the way through our troubles, as did John Mack at Morgan Stanley (MS - commentary - Cramer's Take); initial unemployment claims were down a lot; Citi (C - commentary - Cramer's Take) lined up buyers for $12 billion of the leveraged loans tainting its balance sheet; and the "failed" auction by the Fed showed there is liquidity in the system. Additionally, bank loans and commercial paper outstanding is increasing at an annual rate of more than 9%. The stunning GE report upset that positive vibe. GE is supposed to outperform in tough times, and clearly the current environment is beating everyone up.

Andrew Bary of Barron's Magazine advises in the latest issue to give GE a break. One bad quarter does not condemn a company. He reminds us that GE grew EPS 18% last year, trades at a reasonable 14 times the $2.25 the company is likely to earn this year, and just 13 times the $2.50 that seems likely for 2009. The dividend yield is almost 4%, massive stock buybacks will continue, and it's one of a handful of companies that has a AAA-rated balance sheet.

My own opinion (I own the stock) is that time will be needed for management to heal the wounds inflicted this past week. I'm not selling, and I like the price of $32, but I don't like the timing.

The health, or lack of health, of the current quarterly reporting season is in question. At the start of the quarter, estimates were for about 4% growth in earnings per share for the companies in the S&P average. By the end of the quarter, the consensus was for a decline of 12%, and that included a healthy GE. This week will bring some bellwether reports - Johnson & Johnson (JNJ - commentary - Cramer's Take) , IBM (IBM - commentary - Cramer's Take), Google (GOOG - commentary - Cramer's Take), Citi -- and they will be agonizingly scrutinized. One that holds a lot of interest is Merrill Lynch (MER - commentary - Cramer's Take) on Thursday. The consensus is for a loss of $1.90. Chairman John Thain said recently Merrill does not need additional capital. Star analyst Meredith Whitney says to expect big losses and the need to raise more capital. We'll see.

I continue to believe we saw the market lows this past January and have had several tests of those lows. I wrote just last week that we were (then) 1,000 Dow Jones points above the January intraday low of 11,600 and that we would likely have to give some of that back. We are in the process of doing just that.

Long GE

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Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.