Fractions Getting Smaller In Current Pricing System.

WHEN it comes to pricing, most investors have probably seen the shares they hold split to the 32nd or even the 64th of a dollar. But it's rare to see prices sliced to the 256th.

Still, that's exactly what happened last week when Imperial Credit Industries Inc., the struggling Torrance-based diversified business lender, saw its stock trade for $1 and 3/256

Wall Street may be moving closer to pricing stocks by the less arcane decimal system, but traders are nevertheless seeing more very small fractions under the current pricing formula, says John Marrone, market veteran and branch manager in West Los Angeles for Roth Capital Partners.

"It's still rare, very uncommon to see a 256th, but they are popping up," said Marrone. "We seem to be seeing more of them, as we move to the decimal system."

Under pressure from federal regulators, the NYSE and other exchanges are glacially moving toward pricing stocks the way merchandise has long been tagged in America - in dollars and cents. The English system of fractions, based on halves (i.e., half, quarter, eighth) has been in use since the stock market was founded under New York City's famed Buttonwood Tree in 1792.

The recent quote on Imperial Credit also reflects the low trading price, and probably that some large trades of the stock are being done.

Obviously, when buying $60,000 worth of a stock at, say, $60 a share, then arguing over a 1/256th isn't worth the air. But when buying $60,000 worth of stock that's trading for around $1 a share, each fraction makes a difference.

By the way, the New York-based, credit-rating house Moody's Investor Service recently downgraded Imperial Credit's senior debt to "Caa," from "B3," and stated that the "ratings outlook remains negative" for the debt. Caa is pretty grim, as it stands for "poor to default." As Moody's pointed out, Imperial Credit has been suffering from defaults in its loan portfolio, and has been taking writedowns.

But Moody's praised Imperial Credit for recent "prudent" actions in taking the writedowns and hiring experienced officers to handle new problems.

Tar Time?

Joseph Di Lillo has been banging around in Los Angeles brokerage circles for a long time after starting up the old Drake Capital Securities back in 1982 in downtown Los Angeles. Years ago, he moved his shop out to Santa Monica, and then three years ago sold his firm to New York-based Paragon Capital.

The acquiring firm changed its own name to Drake & Co. But last summer, Drake & Co. sold what had been the original Drake to West Los Angeles-based InterFirst Securities.

The old Drake office is now a "trading desk" for InterFirst, said Di Lilo, who is still in command of the office but wondering about all the corporate transitions.

In refreshingly blunt comments last week, Di Lillo said he is "trying to figure out what to do with my life." But in the interim, he is doing some investment banking in the energy sector, his long-time ken. He is raising money for one local stock, Yorba Linda-based Geo Petroleum Inc., which owns vast "heavy, heavy oil" deposits in Oxnard and under Torrance.

A microcap traded in the pink sheets, Geo applied last week to be listed on the OTC-BB (electronic bulletin board), under the symbol GOPL.

Historically, tar-like deposits of the type controlled by Geo have sold for less than more-liquid crude, due to greater costs in extraction and refining. But, says Di Lillo, increasing demand from road-builders is hiking prices for heavy crude, in conjunction with generally higher oil prices.

"Every time you see a new road, it is made with asphalt that is mixed with tar, polymers and old tires. The fields that Geo owns are perfect, perfect for new highway construction," says Di Lillo.

Geo and many other small energy companies got pounded in 1998 and 1999, as oil prices plunged. "You had the warm winter in the East (in 1999), and the whole Far East situation (recession), and for whatever reason OPEC produced a lot of oil. At $10 a barrel, every stripper well in the U.S. was shutting down," says Di Lillo, describing the late 1990s. Heavy oil wasn't worth extracting at that time.

But now, oil prices are back around $30 a barrel, and demand for tar is strong, thanks to road building, says Di Lillo.

"I still think some of the oil stocks are cheap. (Based on current oil stock prices, investors) are factoring in $20-a-barrel oil," comments Di Lillo. "But the supply and demand hues suggest that oil will stay more at $30, unless there is a crisis in the Mideast."

On the overall stock market, veteran Di Lillo is still a bit nervous. "History will record that the last four years (1996 through 1999) were a bubble. Even blue chips don't usually trade around 30 times earnings (current trading range of the S&P 500 index). Even 20 times is high."

Junkyard Investing

Junk bond investing? Even high-yield bond market mavens don't tout the sector as an investment field for amateurs.

"Tell your readers, 'Don't try this at home,"' joked Howard Marks, chairman and founder of high-yield money management shop Oaktree Capital Management LLC in downtown Los Angeles.

Two years ago, junk bonds took a hit in the flight-to-quality scare that followed the Far East meltdown and the long-term capital management collapse. Since then, default rates on high-yield bonds have inched up. Twelve to 18 months ago, about 4 percent of outstanding junk bonds were in default; now that rate is up to about 5 percent. And the upward creep is keeping the timid away from junk.

Perceived risk means returns, of course. "You are seeing yields run 700 basis points (7 percent) higher on junk bonds (than Treasury bills with similar maturities)," said Marks, who founded Oaktree Capital in 1995 with just a couple billion bucks under management, after splitting off from Trust Co. of the West, also downtown.

Now Marks employs 180 people and manages $18 billion in high-yield bonds, distressed debt and private equity investments. Individuals can invest in junk bond mutual funds (Marks doesn't offer one, however), and if invested through an IRA or 401(k) tax plan, they can accumulate the interest tax-deferred, he points out.

"That's 12 to 13 percent interest a year, tax-deferred. You'll double your money in about six years," Marks said.

Do you expect the Dow Jones to hit 20,000 by 2006? For sure?

Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal.