SAN FRANCISCO -- The bad news in chips shifted from the future to the present Friday, as investors panicked that a feared spending slowdown has already begun.

Virtually every semiconductor stock declined in midday trading Friday, following an ugly U.S. employment report and chip giant Intel's ( INTC) second downgrade of the week by a Wall Street brokerage.

Shares of Intel were down 7.8%, or $1.93, at $22.74 in midday trading. Intel's stock is off nearly 14% in the first few days of 2008.

Cramer: Ignore the Semi Downgrades

JPMorgan analyst Chris Danely cut his rating on Intel from overweight to neutral Friday, citing reasons similar to Bank of America's downgrade on Wednesday.

"Our checks indicate Intel experienced a late-quarter slowdown in order rates from the PC end market which negated the upside we believed Intel experienced earlier in 4Q07," wrote JPMorgan analyst Christopher Danely in a note to investors.

Danely traced the weakness to the European PC market, where he said PC maker Acer and electronics retailer DSG have both recently lowered estimates because of disappointing order rates. And he said there is an increasing chance that PC components could be at risk of an inventory glut.

The Philadelphia Stock Exchange Semiconductor Sector Index fell 4.5% to 373, the lowest level since September 2004.

Nvidia ( NVDA) tumbled 7.9%, or $2.59, to $30.16, while Atheros ( ATHR) fell 8.1%, or $2.40, to $27.

Texas Instruments ( TXN) was off 3.8%, or $1.20, at $30.44.

For months chip stocks have been under pressure due to worries that a potential economic recession in the U.S. could cause consumers to cut back on purchases of consumer electronics, which account for more than 50% of semiconductor revenue.

Now chip stocks are seeing further downside as investors seize on evidence that, recession or not, consumer electronics demand is already stalling.

Avian Securities head of research Avi Cohen says all the gloom and doom is premature.

Cohen's firm, which monitors pricing and inventory levels of key PC components including processors, disk drives and displays, says his data refutes the reports of chip inventory problems. According to Cohen, distributor inventory levels at the end of December were at very low levels compared to previous years and pricing remains extremely stable.

"One thing that's clear is that wherever you look, demand has been pretty good in Q4 and inventories exiting Q4, according to our data, have been very good," says Cohen.

That doesn't mean demand won't fall off a cliff over the next three to four months, says Cohen. But for now at least, he says, business is still holding up.

Amid the blizzard of conflicting analyst reports, channel checks and economic anxiety, chip stocks are getting battered around. The only question now is when the fog will lift, and how far will chip stocks have fallen.

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