FINANCIAL MARKETS : O.C. Debacle, Inflation Fears Send Stocks, Dollar Lower

Orange County’s bankruptcy filing and inflation warnings from Federal Reserve Chairman Alan Greenspan rattled the nation’s financial markets Wednesday sending stocks prices and the dollar lower.

The Dow Jones industrial average fell 10.43 points to 3,735.52. In the broader market, declining issues outnumbered advancers by about 11 to 5 on the New York Stock Exchange, while 283.49 million shares changed hands, down from 298.90 million on Tuesday.

Broad-market indexes also fell, led by the Nasdaq composite index, which tumbled 6.96 points, or almost 1%, to 246.85.

Orange County sought bankruptcy protection on Tuesday following the disclosure of a $1.5-billion loss in its investment portfolio partly because of a highly risky strategy that backfired when interest rates began rising this year.

While most analysts do not believe stocks will be directly affected, the news had a negative “psychological effect” on the stock market as bond yields rose in response, said Bob Walberg, senior equity analyst at MMS International, a money management concern.

Long-term Treasury yields rose, but shorter-term yields fell as investors dove into safe-haven securities.

Meanwhile, Greenspan told the Joint Economic Committee that economic growth has been stronger than expected. Greenspan said consumer prices could start to rise.

Analysts said the comments raised speculation the Fed may raise short-term interest rates as soon as its next policy-making meeting on Dec. 20.

The dollar weakened against most key currencies, falling below 100 yen for the first time this week amid nervousness about the potential implications of the Orange County financial crisis.

The U.S. currency closed at 99.94 Japanese yen and 1.568 German marks, down from 100.08 yen and 1.572 marks Tuesday.

Among other market highlights:

* Shares of major securities firms fell on the Orange County bankruptcy news. Merrill, Lynch & Co. dropped 1 1/4 to 35. Its asset management unit said its holdings of bonds and notes sold by Orange County fell to $60 million from $110 million in July.

* Franklin Resources Inc. fell 7/8 to 35 3/4 after an Oppenheimer & Co. analyst downgraded the stock, citing Franklin’s California municipal bond funds’ potential exposure to Orange County. Morgan Stanley lost 1 5/8 to 56 7/8.

Big losers among the Dow average components were Caterpillar, off 7/8 to 52; IBM, down 3/8 to 71 1/4; Alcoa, off 3/4 to 82 1/8, and General Motors, down 3/4 at 38 3/4.

* The stocks of health maintenance organizations fell after a trade group said enrollments would rise but premiums fall slightly in 1995. US Healthcare fell 2 1/4 at 40 7/8 in Nasdaq trading. United Healthcare fell 2 3/8 to 43 5/8 on the Big Board.

* Continental Corp. surged 4 3/4 to 18 3/4 following Monday’s news that it is to be acquired by CNA Financial Corp. for $1.1 billion cash, or $20 a share.

* Alaska Air Group dropped 1 5/8 to 14 3/8 after two analysts downgraded the stock and cut earnings forecasts.

Overseas stock markets were mixed. Overseas markets were mixed: Tokyo’s 225-share Nikkei average closed fell 166.24 points to 19,174.23. In Frankfurt, the 30-share DAX averaged closed at 2,055.60, up 8.72 points and London’s Financial Times 100-share average ended the day down 3.6 points at 3,012.5.

Mexico’s Bolsa index rose 6.53 points to 2,520.89 on light volume.