Barclays Knapp Drops Bearish Call, Sees S&P 500 Rising in 2009

By Jeff Kearns and Elizabeth Stanton

July 14 (Bloomberg) -- Barry Knapp, previously Wall Street's most bearish stock strategist, now says the Standard & Poor's 500 Index may eke out a 3 percent gain in 2009 as industrial production recovers and credit markets improve.

Knapp, the head of U.S. equity strategy at Barclays Plc in New York, raised his S&P 500 target to 930 from 757, citing forecasts for a rebound in U.S. growth. Economists estimate gross domestic product will expand 0.95 percent in the third quarter and 1.9 percent in the fourth after contracting in five out of the preceding seven quarters, according to data compiled by Bloomberg.

Rallies such as the 33 percent advance in the S&P 500 over the last four months tend to continue after a "correction" of about 10 percent, Knapp wrote in a note to clients. The 47-year- old analyst said he failed to foresee the size of the gain since the index fell to a 12-year low on March 9 of 676.53.

"The magnitude of the advance took us by surprise -- it was double what we were expecting in half the time," Knapp wrote. "History suggests you get a 5 percent to 10 percent correction after the initial advance before witnessing another push higher.

"Previously, Knapp said slumping profits at banks and companies that depend on consumer spending would push the gauge down 17 percent this year. He said valuations were too high relative to sales, with the S&P 500 trading at 0.92 times annual revenue, compared with a low of 0.34 times in 1982, according to his data.

Biggest Bears

Knapp's new estimate compares with a mean projection of 985 for the U.S. stock benchmark among the 10 forecasts tracked by Bloomberg. His increase leaves Kevin Gardiner of HSBC Holdings Plc and Jason Todd of Morgan Stanley tied for the lowest S&P 500 projection at 900.

Knapp was alone among the biggest Wall Street firms in predicting at the start of the year that the S&P 500 would decline to its lowest level in more than a decade. He also called the March rebound in the S&P 500.

Government efforts to repair credit markets will help the S&P 500 gain 27 points from last year's close of 903.25, Knapp said. The Treasury Department is financing as much as $1 trillion in purchases of banks' distressed assets and the Federal Reserve pledged to buy more than $1 trillion of bonds.

The Libor-OIS spread, which measures banks' reluctance to lend, has narrowed to 31 basis points, or 0.31 percentage point, the lowest level in almost 18 months. It widened to a record 364 basis points in October, following the collapse of New York- based Lehman Brothers Holdings Inc.

Trading Desk

Promoted to chief stock strategist four months before Lehman's collapse, Knapp moved to Barclays when the London-based bank bought his unit and put him in charge of U.S. equity strategy. Before the appointment, he was a trader on Lehman's so-called prop desk where he bet the fourth-largest U.S. securities firm's capital on stocks and bonds.

Married with three children, Knapp is the son of an electrical engineering professor at the University of Connecticut in Storrs and a schoolteacher. He attended the University of Rhode Island on a soccer scholarship and aimed at a professional career in the sport -- until the North American Soccer League collapsed in 1984, the year he graduated.

The midfielder fell back on his economics and finance degree, landing jobs at Merrill Lynch & Co. in New York and Boston-based Fidelity Investments while pursuing a Master of Business Administration from Fordham University at night. He joined Lehman in 1989 to sell equity derivatives.

`Alive'

"The key point is that the capital markets have normalized," Knapp wrote. "The broad improvement in capital markets implies that the recovery is very much alive.

"No other analyst came as close to predicting how far the S&P 500 would fall as Knapp, who said the gauge would drop as much as 29 percent from the Dec. 31 level to 639. The index sank 25 percent through March 9, its worst annual start.

David Kostin, U.S. investment strategist at New York-based Goldman Sachs Group Inc., said the S&P 500 might dip 17 percent to 750 during the first quarter before moving higher. Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. in New York, said high borrowing costs would prevent gains during the first half of the year. Tobias Levkovich, chief U.S. equity strategist at New York-based Citigroup Inc., said any advance in stocks early in the year in response to economic stimulus measures "will likely fade.

"Forecasting Gains"

Levkovich expects the S&P 500 to end 2009 at 1,000, Lee at 1,100 and Kostin at 940.

The S&P 500 rallied the most in seven decades from its March 9 low to gain 40 percent to this year's peak of 946.21 last month. Knapp said the speed of the increase helped convince him to change his old forecast.

"To be frank, our previous target has been stale for a while since it was based, in part, on the probability that the S&P fell to a level we considered a valuation floor," he wrote. "Since we last revised our target, we wrote that the timing and the nature of the rally in equities made it look like the `real thing' to us."

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