impending interest rate hike by the Federal Reserve has sent the Philadelphia Semiconductor Index (AMEX:$SOX.X) on the downward trend since early April.

Xilinx (NASDAQ:XLNX), the No.1 maker of programmable logic chips used in equipments from networking to industrial control, said in its press release on Wednesday that its June quarter revenues are expected to be up 5 percent to 8 percent sequentially, unchanged from previous guidance. Xilinx sees its gross margins to climb above the original forecasted range of 63 percent to 64 percent as a result of

Investors seemed to respond negatively to Xilinx's business update as some analysts argued that Xilinx's forecast is less upbeat than that given by its rival, Altera (NASDAQ:ALTR). Earlier, Altera forecasted its revenue to grow within the range between 7 percent to 9 percent. Negative sentiment could also come from rumors such as inventory congestion, yield problems in the 90 nanometer process and insider trading activities. Mr. Thomas Smith, S&P analyst, pointed out in his research report that an inventory issue in the chip sector including programmable logic does not exist. He, however, cut his XLNX stock rating from a buy to accumulate, based on his valuation multiple compression model.

According the SEC filing, Mr. Willem P. Roelandts, Chief Executive Officer of Xilinx, sold a total of 150,000 shares since the beginning of March 2004 and now holds approximately 68,000 shares. We believe that this insider activity does not reflect the fundamentals of the company. Technically, Xilinx's stock has a short-term resistance at $36.50. Any good news, both external or internal, could drive the stock price through this resistance with a near-term price target between $38 and $40.

For the overall chip sector, encouraging news came later in the week from chip giant Intel (NASDAQ:INTC), who told investors at its conference call that the company expects revenue for the second quarter to be between $8.0 billion and $8.2 billion, as compared to the previous range of $7.6 billion to $8.2 billion. The gross margin will also be higher by a couple of points than the previous guidance of between 60 percent and 61 percent.

Prior to Intel's mid-quarter financial update, Wall Street's analysts were very skeptical, including Mr. Michael Metz, chief investment strategist at Oppenheimer & Co. who suggested in an interview on CNBC, the financial news network of the NBC, that "Already traders have positioned themselves for bad news, .... and I think there is a lot of fear among traders that Intel will warn that recent demand has been a bit disappointing, and that will hurt the whole tech sector". It should be pointed out that as of June 6, 2004, no Oppenheimer fund has ranked in the top-25 technology funds as complied by Morningstar, based upon their 3-year performance.

Intel said that the demand for its microprocessors used in desktop PCs, notebooks, as well as servers, is significantly higher than the same period last year. Intel's business in flash memory, used in cell phones which is currently dominated by Advanced Micro Devices (NYSE:AMD), has recovered after several setbacks last year due to mis-pricing. We believe that strong growth in handset and mobile product sales in the Asia/Pacific region, particularly China, may contribute to Intel's upside surprise. Other wireless chip companies that could benefit from the recent Intel forecast include Texas Instruments (NYSE:TXN), QualComm (NASDAQ:QCOM) and Skyworks (NASDAQ:SWKS), who supplies power amplifiers for most of the CDMA cell phones.

Technically, Intel's stock just broke the resistance level of $28.50 and is now on the up trend with a near-term resistance at $29.50. The long-term trend line predicts that the stock could double within 18 months. The poll of Wall Street's analysts presently gives Intel a "BUY" rating with a 12-month price target of $37. 

Investor Portfolio Model: Our research on the effect of PE multiples and stock performance during the past 10 years, has shown that in an economic expansion phase and interest rate hike environment, tech stocks with high PE multiples tend to outperform those from non-tech sectors, particularly the financial sector with low PE evaluations. This is clearly evident when considering the market during 1994 and 2004 where tech stocks including Intel and Cisco (NASDAQ:CSCO), with an average PE multiple of 30 or higher, have completely beat low PE financial stocks such as Bank of America (NYSE:BAC) and Washington Mutual (NYSE:WM), by an average of 700 percent or more. 

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