Chip Stocks Tumble as Salomon Takes an Unpopular Stand

Solly strikes again.

For the second time in less than a week, Salomon Smith Barney shook a thin summertime stock market with a renegade negative call. Last Thursday, analyst Richard Gardner took apart the PC sector when he claimed to have evidence of rising channel inventories at Compaq (CPQ Quote). Wednesday, semiconductor analyst Jonathan Joseph's downgrade of the semiconductor industry sent the Philadelphia Stock Exchange Semiconductor Index, or SOX, down a colossal 9.3%.

Joseph based his call on a number of distressing macroeconomic and industry-specific factors, including a peak in capital spending, rising inventories among semiconductor producers, decreasing lead times for customers and even some signs of softness in component prices. But the bottom line was that the favorable supply/demand dynamic in the semiconductor industry, which has been responsible for driving the SOX up more than 50% this year, is starting to turn. ...