In short, IC Insights' data shows there was an increase in semiconductor unit sales between 2Q and 3Q in six of the last seven years.  In cases where the increase moved the total above trend, such as mid-2000 and mid-2004, the following quarters showed a significant reduction in shipments, lasting for at least the next two quarters.  (There was no such correction after the mid-1999 increase.)

Said another way, a larger-than-typical portion of 3Q05 sales may be going into inventory build, rather than into end-user sales.  (Coincidentally, Bill Fleckenstein makes almost exactly the same point in his column published this week on MSN.)

Now we have to figure out if this will turn out like 1999 again?  Or will 4Q05 and 1Q06 shipment trends look more like 4Q00/1Q01 or 4Q04/1Q05?

Semi stocks are mostly already priced as though this will be 1999 all over again.

Per the IC Insights press release on September 15, 2005:

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3Q05 IC Inventory Build Underway

Scottsdale, Arizona --- August 18, 2005 --- What causes an electronic systems manufacturer to begin adjusting its inventory level?  How much inventory is too much?  How far above the trend line do IC unit volume shipments need to be before a correction occurs?  Unfortunately, there is no exact excess IC inventory ratio or figure that triggers a correction.  However, there are some factors that IC Insights believes are worth discussing.

One factor that surely comes into play in determining whether an inventory correction is about to take place is the magnitude of the excess IC unit shipments.  One of the gauges that IC Insights believes is very helpful is quarterly IC unit volume growth compared to the historical trend line.

Over the past ten years, IC unit shipments have registered a surprisingly steady CAGR trend --- about 9 percent.  However, Figure 1 indicates that IC unit shipments began to depart from this trend line in 2Q05.  IC Insights forecasts that 3Q05 IC unit shipments will reach about 10 percent above the long-term IC unit volume trend line before falling back toward the trend line in 4Q05 and even further down heading into 2006.

There does not appear to be a precise percentage figure that defines excess IC unit volume levels that cause an inventory adjustment.  However, a significant plus-side departure (10 percent or more) of quarterly IC unit volume shipments from the trend line, coinciding with a slowing of growth (not necessarily a decline) in one or more major electronic system categories (e.g., PCs, cellular phones, etc.) are certainly two "triggers" for an IC unit inventory adjustment.

IC Insights will discuss these and other important trends at its second annual Fall IC Industry Forum to be held from 9:00am to 11:00am on September 22, 2005 at the Four Points by Sheraton Hotel in Sunnyvale, California.  For more information call 1-480-348-1133 or visit www.icinsights.com/events/fallforum/fallforum.html.

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