Despite theapparent semiconductor recovery, there are mixed signals in the chipdistribution channels.

Asian is soft.Europe is improving. But surprisingly, the United States is robust, with selectshortages seen in the channels.

"Recent checks with Asian chip distributors show slight softening, withOctober shipments slightly below plan," said Craig Berger, an analyst withFBR, in a report.

"Our contactsnow say Q4 chip shipments should fall 10 per cent sequentially, worse than ourmonth-ago checks of 2 to 10 per cent sequential declines, driven bylower-than-expected PC chip orders in October and fewer working days in Chinadue to a bigger-than-typical Golden Week holiday," he said.

"Asiandistributor inventories rose in October to 35 days, above September's 30-35days but below June's 39 days, peak levels of 60 days, and targeted levels of40 days. Further, some Asian contacts suggested that some product lead timesare now contracting as the peak seasonal build has already passed. We thinklower lead times are a healthy industry positive that could eliminatecustomers' desires to double-order product or build excess inventories,"he said.
And the U.S. channels? "Unlike the Asian distributor commentary, checkswith multiple U.S.-based distributors indicate that November revenues shouldgrow (month-over-month) for most firms, with book-to-bill ratios generallyremaining above 1," he said.

"Lead timeshave stretched beyond 16 weeks for various broad-based parts, with inventorieslikely to fall farther as shortages set in. Some contacts suggested that selectsuppliers are already discussing 'allocation,' with some contract manufacturersforced to push out OEM product deliveries," he said.
"Some customers are now just beginning to grasp the situation, whileothers are becoming more desperate for parts. Cancellations are said to belimited, not widespread, and 'not worth getting anxious over.' For Q1, contactsbelieve that sell-through could actually grow on a sequential basis if enoughproduct is obtained," he added.

Inventory levelsremain low

Last week, BofAMerrill Lynch analyst Sumit Dhanda downgraded the chip sector to"neutral" from "buy," warning that rising inventory levelsin the supply chain could lead to a correction in semiconductor stock values.Chip stocks traded lower on the downgrade.

In response, PaulMcWilliams, editor of Next Inning Technology Research, wrote in a note toclients that there is no evidence of an inventory buildup at this time.Inventory levels at the company's tracked by his firm have been consistentlymoving down since the fourth quarter of 2008, McWilliams wrote.

Berger of FBRagreed, saying that BofA Merrill Lynch called it wrong. In a report, FBR listedeight basic reasons why chip stocks—and the IC market as a whole—are nottanking.