Chips tell the story

Ever since Cisco and HP announced their poor results, investors have been reacting with a sense of panic, and lot of hand-wringing. It is a little late now, because they ignored the disaster signals coming from the semiconductor sector. The chip equipment makers like KLA-Tencor have been warning about slowing sales for a while. When their sales slow, it means that chip foundries are not buying, because in turn they are seeing slowdown in orders from their customers, mostly fabless chip companies. In other words, chip equipment order book acts like an early warning system for what is going to be an industry wide problem. National Semi cut its forecast yeaterday. Cisco’s rising inventories means that there will little growth in the business of companies like PMC Sierra, Broadcom and others who supply to Cisco.

This morning, Ren Zamora, analyst with Loop Capital wrote, “A stronger case is being made that year-over-year technology growth is slowing more than we originally expected. Near-term, we are less comfortable with the concept that inventory builds are growing to prepare for an increase in customer demand.” His action: cut estimates for Texas Instruments which sells a ton of chips for all things that are supposed to be much in demand: cell phones, DSL modems, VoIP gear, handhelds and other musical gear. Zamora’s actions suggest well these devices are not going to be as hot in the near term. Vishesh points to a good round up on The Washington Post, and writes, “Anyone else get the feeling that the 2003 recovery might be fading? Rember the 2001 debates about whether it would be a “V” shaped or “W” shaped recovery… i.e. would we dip again? Feels like it might be the later.”