Last week, BofA Merrill Lynch analyst Sumit Dhanda downgraded the chip sector to "neutral" from "buy,"

warning that rising inventory levels in the supply chain could lead to a correction in semiconductor stock

values. Chip stocks traded lower on the downgrade.

In response, Paul McWilliams, editor of Next Inning Technology Research, wrote in a note to clients that

there is no evidence of an inventory buildup at this time. Inventory levels at the company"s tracked by

his firm have been consistently moving down since the fourth quarter of 2008, McWilliams wrote.

Another analyst, Craig Berger of FBR Capital Markets, agreed, saying that BofA Merrill Lynch called it

wrong. In a report, FBR listed eight basic reasons why chip stocks--and the IC market as a whole--are

not tanking:
1. The sky is not falling. ""We remain constructive on chip stocks (though under-exposed to PC chip

stocks) and think chip sector can work higher in 2010 (absent a carry trade unwind or other global

macro weakness).""
2. No double trouble. ""We do understand that chip leadtimes are getting longer for some parts (analog,

discretes, memory, other broadbased) and there is some double ordering taking place (a function of

higher leadtimes and the fact that the industry "half ordered" for 3 quarters in 4Q08, 1Q09, and 2Q09).""
3. Cycling the cycle. ""The question isn"t whether double ordering is happening but whether it will lead to

excess inventory in 1H "10, that will then lead to future estimate cuts. Our view is that this cycle is a little

different and 1H "10 estimates are safe.""
4. Massive capacity reductions. ""Much fab capacity has been taken offline and utilizations are fairly

high; can potentially stay high in 2010 as chip firms add incremental capacity.""
5. Inventories lean. ""Inventories in the global supply chain are near bone dry which will drive some 1H

"10 replenishment (when things are seasonally slower); 2010 chip estimates may need to rise not fall.""
6. Demand Improving. ""Overall chip demand continues to improve in 2010 with IT, enterprise, comm.

equipment, networking, and industrial all growth areas (possible PC corporate refresh too).""
7. Customers less likely to hold inventory. ""The idea of holding excess inventory following the pain of 4Q

"08 is now vile and anathema to distributors and others.""
8. Less tolerance for games at distribution. ""The rules at distribution have changed somewhat with

much less tolerance for order cancellations and double booking by end customers now versus prior

cycles.""