Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

Alesco Financial (NYSE: AFN) looks like it will have trouble coming up with the money to repay its debts. This Real Estate Investment Trust (REIT) uses borrowed money to buy into the alphabet soup of securities -- such as Collateralized Debt Obligations (CDOs) and Mortgage Backed Securities (MBSs) -- that could cost Wall Street up to $400 billion in write-downs. With 22% of its float sold short, many investors have already figured out that Alesco, at $3.28, is on life support. But it pays a 31 cent a share dividend, for a 9% dividend yield -- 36% if it was annualized (but I doubt Alesco will be able to continue to pay it) -- which those short sellers are willing to pay because they think the stock has further to decline.

The question about whether to sell short this stock revolves around whether Alesco can pay off its $11.2 billion in debt. Here are some factors to consider:

• Debt repayment. In its most recent annual report of March 2007, Alesco said it was on the hook to repay $3.6 billion It owed in less than a year and then nothing in the intervening years and in more than five years it would owe $6.8 billion. If it has already paid off the $3.6 billion it could be OK. But its most recent quarterly report said it had $91 million in cash so if it owes more than $91 million in the next few months, it could be in trouble. And it's already dedicated $19 million of that cash to dividends.

A number of leading financial newsletter advisors -- including Mark Skousen, Bryan Perry, Daniel Frishberg, and Neil George -- have recently taken positions in specialty finance and mortgage lending stocks, sectors that had suffered from the "meltdown" in the subprime mortgage market.

Mark Skousen, in his The Hedge Fund Trader, notes, "Mortgage lenders are making a comeback." The recent price recovery, he notes, has been broad ranged, covering most thrifts and mortgage trusts. He notes, "It appears that investors have concluded that the subprime lending scandal was limited."

iStar Financial (NYSE: SFI), he states, is his favorite commercial REIT. In fact, it was a recent announcement from iStar that acted as a catalyst for an improvement in the overall sector.

He explains, "California savings & loan Fremont General Corp. (NYSE: FMT) announced that it would sell its commercial real estate lending business to iStar Financial for about $1.9 billion. With Fremont expecting now to survive its subprime mortgage woes, many now consider the real estate industry recovery to be real."

Skousen also points to strong insider buying of shares in thrifts and mortgage banks.