U.S. stocks fall as internet shares tumble amid debt impasse

‘More Unpredictable’

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, chief executive officer 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 Brothers Holding Inc., he said.

“What frightens us the most is what happens to the plumbing system of the global-financial system,” El-Erian said in an interview on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene. “You will have cascading failure, multiple defaults, and Treasuries that act as collateral would be very difficult to exchange and people will simply step back. It will be like Lehman, but more unpredictable.”

Volatility High

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, jumped 4.8% today to 20.35, its highest close in 2013.

From its intraday low of 12.52 on Sept. 20, the VIX jumped 68% to its highest level of today, 21.01. That’s the fifth time in 2013 that the index climbed more than 50% from trough to peak, according to data compiled by Bespoke Investment Group and Bloomberg. The gauge of options prices remains almost 58% below its 2011 high, the data show.

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

The Nasdaq Internet Index tumbled 4.1% for the biggest decline since November 2011, as all its 81 members dropped. The gauge had surged 49% this year through yesterday, almost triple the gain in the S&P 500. At 24 times reported income, the valuation in Internet shares has risen 67% this year.

‘Locking in’

Facebook, the operator of the world’s most popular social network, slumped 6.7% to $47.14. The stock had advanced 90% this year through yesterday. Yahoo declined 3.5% to $32.93, trimming its 2013 gain to 65%. TripAdvisor Inc., an online travel agent that’s up 71% this year, sank 5.5% to $71.70.

“The debt ceiling is causing the fear over locking in returns,’” Ian Winer, director of equity trading at Wedbush Securities Inc., said in an interview. “Guys are looking at their portfolios and saying, ’These are up huge, maybe I sell some to lock in some gains and revisit post debt-ceiling resolution.’”

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

Xerox dropped 2.5% 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.

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