June 18 (Bloomberg) -- Never in the history of Wall Street have analysts been so bearish. The good news is they're also getting it right more often, helping make investors richer by betting against corporate America.

Thank the regulatory hammer of former New York Attorney General Eliot Spitzer. In 2003 he forced 10 big firms to separate investment banking from research to avoid the conflicts of interest that tempted analysts to keep their reports upbeat.

``The industry has changed: you're not anathematized if you come out with a negative opinion,'' said Robert Stovall, whose work on Wall Street the past five decades included stints as a strategist at the securities unit of Newark, New Jersey-based Prudential Financial Inc. and research director at Nuveen Corp. in New York. ``It used to be that sell recommendations were frowned upon. I even worked at firms where the CEO said, `I never want to see a bearish word on my stationery.'''

That transformation has helped investors following analysts' advice to beat the market. Nine of those 10 firms have been accurate the past two years, according to Investars, which tracks analysts' performance.

Stovall, 81, now helps oversee $1.6 billion as global strategist at Wood Asset Management Inc. in Sarasota, Florida.

More Pessimistic

Analysts have grown more pessimistic as the Standard & Poor's 500 Index climbed above its March 2000 peak last month and reached a high of 1539.18 on June 4. The benchmark for U.S. equities has since lost 0.5 percent. The last time the S&P 500 posted a record seven years ago, buys exceeded holds by about 3- to-1. The index then tumbled 49 percent through October 2002.

Buy recommendations slipped below holds as a percentage of total U.S. stock picks for the first time ever in February, and now trail 45.3 percent to 47.8 percent, according to data Bloomberg began tracking in 1997. Sells have increased to 6.9 percent from 1.9 percent in March 2000.

The amount of shorting -- where traders sell borrowed stocks expecting to buy them back when prices fall -- jumped to 3.1 percent of shares listed on the New York Stock Exchange in May. That's the highest since at least 1931, according to Bespoke Investment Group LLC, a research firm in Mamaroneck, New York.

So-called short interest on the NYSE rose to a record 11.8 billion shares as of May 15, 7 percent more than a month earlier, according to the NYSE, the world's biggest exchange.

Research from New York-based Investars shows the number of Wall Street firms producing S&P 500-beating recommendations has increased from only two in 2003.

$1.4 Billion

That year, Merrill Lynch & Co., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and six other firms were required to cordon off analysts from bankers. They paid $1.4 billion to settle claims by regulators that they had pushed stocks to please clients and keep deals flowing.

``When you hear some advice, when you invest in a company, what you are told is more likely to be truthful,'' Spitzer said in a May 29 interview from Albany, New York. ``We have passed through a spasm during which we needed to wring out some improprieties.''

Spitzer, now governor of New York, spurred an improvement in the accuracy of analysts, Investars data show. Only Piper Jaffray Cos.'s buy recommendations failed to beat the S&P 500 during the past two years. Credit Suisse Group's picks outperformed the index by the most -- 4.7 percentage points --followed by JPMorgan Chase & Co.'s 2.9 points and UBS AG's 2.8 points, according to Investars, an eight-year-old firm owned by privately held Netologic Inc. of Wilmington, Delaware.

Beating the S&P 500

The company, in which Goldman owns a minority stake, provided data to Spitzer in 2002 analyzing the accuracy of 110,000 analyst recommendations.

Investors who mimicked both the buy and sell recommendations of seven of the 10 brokers beat the S&P 500 since June 2005, according to Investars. That compares with two out of 10 from June 2003 to June 2005.

Bear Stearns Cos. and Lehman Brothers Holdings Inc. underperformed while UBS tracked the market's performance, trailing by only 0.04 percentage point during the past two years. Merrill added the most value -- 23.9 points -- followed by Piper Jaffray's 20.4 points and Credit Suisse's 10.8 points.

Five years ago, analysts ``were a good contrarian indicator,'' said John Eagleton, president of Investars. Now, they ``are being compensated based on performance, so their energy and their intellectual insight is going into generating good buy, sell, hold recommendations.''

`More Discerning'

Ernie Ankrim, who helps manage about $200 billion as chief investment strategist at Russell Investment Group in Tacoma, Washington, agrees.

``Analysts are encouraged both by regulation and by firm policy to be more discerning on their calls on stocks,'' he said.

The S&P 500 has advanced four straight years and almost doubled since its nadir on Oct. 9, 2002. That surge may explain why analysts have turned so negative on stocks, Ankrim said. ``As the market has marched on, the objective analyst has to say, `Gee, I liked the stock back then, but it's up 20 percent. It's hard to like it as much now.'''

Goldman analysts had buy ratings on 28 percent of the companies they covered on April 1. Sells amounted to 13 percent. On May 23, Goldman advised short selling shares of Santa Clara, California-based Applied Materials Inc., the world's biggest maker of chip-production equipment.

Goldman, Merrill, Citigroup and Morgan Stanley are all based in New York. They were joined in the April 2003 Spitzer settlement by three other New York-based firms, Bear Stearns, JPMorgan and Lehman, as well as Minneapolis-based Piper Jaffray and Zurich's Credit Suisse and UBS.

`Telling Indicator'

Rising stock prices tend to lift equity-trading revenue at securities firms, making them inclined to favor bull markets. Lehman said last week that revenue from stock trading almost doubled to a record $1.7 billion in the second quarter, which ended May 31.

``Wall Street gets paid to be bullish,'' said Richard Weiss, Beverly Hills, California-based chief investment officer at City National Bank, which oversees more than $55 billion. ``If they're bearish, that's a pretty telling indicator.'' Weiss was an analyst at UBS's PaineWebber Group Inc. in 1986-87.

Byron Wien, chief investment strategist at Westport, Connecticut-based hedge fund Pequot Capital Management Inc., is convinced analysts remain a contrarian indicator just as they were in March 2000, when stocks began their 2 1/2-year plunge and buy ratings exceeded holds 72.7 percent to 25.4 percent.

`Generally Not Right'

``Analysts are generally not right,'' said Wien, who left Morgan Stanley in 2005 after 20 years with the firm. ``That's the sad irony of this business. When everybody's on the positive side, it's usually a time of danger. When everybody says `hold,' it's probably time to take a hard look.''

Wien estimates the S&P 500 will reach 1600 at the end of this year, a 13 percent increase from Dec. 31. The measure has risen 8.1 percent to 1532.91 so far in 2007.

The Federal Reserve helped fuel the 4 1/2-year bull market in stocks by cutting its benchmark lending rate to 1 percent in 2003, the lowest in more than four decades. Lower lending rates tend to spur economic and profit growth.

The S&P 500 pulled back from its June 4 record as the yield on 10-year U.S. Treasuries rose to 5.327 percent, the highest in five years, according to Cantor Fitzgerald LP, on concern the Fed will increase rates. The central bank's benchmark has been at 5.25 percent since June 2006. Should the bull market falter, investors may get profitable advice from Wall Street analysts.

``It used to be that short-sell ideas were sort of un- American,'' Stovall said. Now, ``some of the best work is done on the short side.''

To contact the reporters on this story: Nick Baker in New York at nbaker7@bloomberg.net; Daniel Hauck in New York at dhauck1@bloomberg.net.

Last Updated: June 18, 2007 16:02 EDT