Tobias Levkovich, chief U.S. equity strategist at Citigroup, presented his bullish perspective on CNBC Thursday (see CNBC article).

Source: CNBC Video
Some points from the Levkovich interview include:

• Production rates have to pick-up, and not because final demand is picking-up, but because inventory levels are so low.
• Earnings are a function of production. Top-line growth will pick-up. This will cause the second half GDP to be higher.
  
• Cost controls were not a one quarter phenomenon, but will provide even more operating leverage to the upside going forward.
• Worries of lower consumer spending hurting GDP are overblown. Over the last 30 years nearly all of the growth of consumer spending as a percent of GDP has come from health care expenditures. It is an illusion that we have always had isolated increased spending. When spending did increase, so did wealth. Debt increased $6 trillion, but assets increase $24 trillion over the same time frame.
• While we will see sales growth this year (which is counter to conventional wisdom), 2010 estimates that are calling for a 22% gain in earnings might be a little high.
• Finally, while there is a possibility of a market correction later in the year, an overshoot to 1,100 on the S&P 500 is very plausible. Positive moves in the market will be supported by the strength of Q2 earnings and the probability of second half earnings power.

With leverage no longer propping up demand, many analysts point to signs that we are either currently in, or are approaching a deflationary period, with some expecting this period to last up to 12 to 18 months (see Investment News article). Gary Shilling, who has written a couple of books on the topic of deflation, believes the period of deflation could be much longer, on the order of 5-10 years. In addition to providing a signal of lower consumer spending, and subsequently lower GDP, deflation also increases the impact of debt in real terms for both corporations and consumers. As for investment plays, analysts recommend looking at utilities, agricultural, and high-quality and in-demand consumer staples, in edition to U.S. Treasury bonds and good old fashion cash.

Consumer spending fell 1 percent last month, while the savings rate rose 2.8 to 3.6 percent (see Washington Post article). Given that consumers have less revenue streams than before - employment (still for most), but less bonuses, dividends, capital gains, and home equity cash - it makes sense that they are saving what income they are receiving, just in case job losses hit their family, or the recession deepens or becomes prolonged. While the benefits of lower energy cost are helping, memories of $4 gas are also still in the minds of consumers. This of course continues to be bad news for consumer retail, and continues to help separate the wheat from the chaff as companies such as Circuit City and Linens 'n Things can no longer take the slowdown, and subsequent lack of sales and profits. I suspect that as we continue to keep hearing about how this is going to be an extended recession and even longer recovery, consumers will do their part to insure that it is indeed long as they reduce spending and save what disposable income they have. Ironically, it may be this prudent saving that helps keep the housing and stock market ATMs that consumers have depended on short of cash for quite a while.

Many outlets are reporting that retail sales are up 0.2% when economist were expecting them to be flat at best. Don't forget that retail sales are given in nominal terms (not real terms), and are not adjusted for inflation. For instance, if you buy the same quantity of items, but they are 3% more expensive, retail sales will be up 3%. Digging deeper in the data we find that we spent less on furniture, clothing, and appliances (new things we don't need, at least not right now), and more on food and gasoline (things we do need). As it turns out, excluding gasoline, sales were unchanged, which was probably better than expected. We also probably bought less gas, but it was up 11% this year (6.9% in February), resulting in higher overall retail sales numbers.