Stocks fall as Internet shares tumble amid debt impasse

Escalating tensions over the budget and debt ceiling debates in Washington, D.C., sent stock prices tumbling again Tuesday.

The Dow Jones industrial average fell 159.71 points to 14,776.53. The Nasdaq Composite Index lost 75.54 points to 3,694.83 and Standard & Poor’s 500 Index declined 20.67 points to 1,655.45, its biggest two-day loss since June 21.

For the day, the Nasdaq was down 2 percent, the S&P 500 fell 1.23 percent and the Dow lost 1.10 percent.

Investors will now prepare for the start of corporate earnings reports for the third quarter.

Commodities were little changed. Gold dropped 50 cents to $1,324.60 an ounce and oil rose 49 cents to $103.49 a barrel.

An index of Internet stocks tumbled the most in almost two years, sinking 4.1 percent. Facebook Inc. (Nasdaq: FB) and Yahoo! Inc. (Nasdaq: YHOO) lost at least 3.5 percent. Xerox Corp. (NYSE: XRX) slid 2.5 percent after announcing the U.S. has been probing the accounting practices of its outsourcing division.

Alcoa Inc. (NYSE: AA) gained 1.8 percent in late trading after reporting third-quarter earnings that surpassed forecasts.

President Barack Obama said the U.S. economy risks a “very deep recession” if Congress doesn’t raise the debt ceiling. Obama spoke less than four hours after he called House Speaker John Boehner to “reiterate that he won’t negotiate on a government-funding bill or debt-limit increase,” said Brendan Buck, a Boehner spokesman.

Lawmakers began taking the first tentative steps toward a path to raising the limit even as the rhetoric grew more divisive. Senate Democrats are planning a test vote before the end of this week on a measure that would grant Obama authority to raise the ceiling, probably for a year, unless two-thirds of both chambers of Congress oppose.

The Treasury has said that it will exhaust measures to avoid exceeding the borrowing limit Oct. 17. If that happens, the government will run out of cash to pay all of its bills at some point between Oct. 22 and 31, according to the Congressional Budget Office.

Even as the probability of a U.S. government default is “very, very small,” volatility in the markets will increase in coming days, Mohamed El-Erian, CEO and co-chief investment officer at Pacific Investment Management Co.

A U.S. default on its debt obligations would prove more unpredictable to financial markets than the 2008 collapse of Lehman Bros. Holding Inc., he said.

Nine of the 10 S&P 500 main industries fell as telephone, materials, consumer-discretionary and technology stocks slipped more than 1.6 percent for the worst performance.

Facebook, the operator of the world’s most popular social network, slumped 6.7 percent to $47.14. The stock had advanced 90 percent this year through Monday. Yahoo declined 3.5 percent to $32.93, trimming its 2013 gain to 65 percent.

TripAdvisor Inc. (Nasdaq: TRIP), an online travel agent that’s up 71 percent this year, sank 5.5 percent to $71.70.

Stocks with the highest short interest were among the market’s biggest losers. A Goldman Sachs Group Inc.’s (NYSE: GS) basket of stocks with the most bearish bets against them slid 2.3 percent, paring its rally in 2013 to 35 percent.

Xerox dropped 2.5 percent to $10.14. The U.S. Securities and Exchange Commission has been probing the accounting practices of Affiliated Computer Services Inc., an outsourcing company acquired in 2010, Xerox said in a regulatory filing. The SEC focused on whether revenue from ACS equipment and resale transactions should have been recorded on a net rather than gross basis, Xerox said in the filing.

McKesson Corp. climbed 3.2 percent to a record $133.72. The largest U.S. drug distributor is in advanced talks buy German drug wholesaler Celesio AG, Dow Jones reported, citing unidentified people.

Alcoa gained 1.8 percent to $8.08 in late trading. The largest U.S. aluminum producer reported third-quarter profit that surpassed analysts’ expectations after higher earnings from one of its divisions that turns the metal into auto and aerospace parts. The stock fell 0.4 percent during the regular session today.

The Alcoa release marks the unofficial start of the U.S. quarterly earnings season, as it is the first S&P 500 company to report results whose fiscal year follows the calendar. JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) will also report this week.

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