MAJOR PAPERS:

• Long Island, NY's Astoria Financial Corp (NYSE: AF) has found a novel way to reduce the number of its nonperforming loans by changing its internal policy on when mortgages are classified on its books as troubled, the Wall Street Journal reported. By counting home loans as non performing when the borrower misses at least three payments, not two, Astoria reduced its non-performers to $69M from $106M in three months.
• The Wall Street Journal also reported that the indictments of Matthew Tannin and Ralph Cioffi, two former Bear Stearns hedge-fund managers, are expected to cite a personal e-mail suggesting the funds were "toast," four days before they told investors they had little to worry about. JP Morgan Chase & Co (NYSE: JPM) has said it will cover the legal costs of the fund managers.
• Hewlett-Packard Company (NYSE: HPQ) is set to reorganize its printer unit. The Wall Street Journal said that the unit's five business units will be cut down to three to become more efficient at adapting to a marketplace in which consumers are relying less on printing.
• According to people close to the situation, the Financial Times reported that Anheuser-Busch Companies Inc's (NYSE: BUD) board of directors is planning to meet this week to discuss the $46B bid from rival brewer InBev.

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 I 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.

If you had followed my suggestion back on April 4th to sell short shares of Coast Financial Holdings Inc. (NASDAQ: CFHI) -- when it traded at $6.90 -- and cover your position on Monday morning at $3.90, you could lock in a return of 77% -- pretty good for about six weeks' risk.

Based on my analysis of its first quarter 2007 10Q filed May 10th, here are the reasons why I think CFHI has tumbled:

• Net loss increased 7.7 times. CFHI's Q1 2007 net loss of $2.4 million was 7.7 times its net loss in Q1 2006.
• Provision for credit loss up 11-fold. CFHI's Q1 2007 provision for credit losses of $1.4 million was 10.7 times its Q1 2006 provision. Meanwhile its nonperforming loans increased 38-fold to $38 million in Q1 2007.
• Many loans to bankrupt developer. CFHI's construction-to-permanent loan portfolio was hit by the downturn in the Florida real estate market and the failure of a local builder -- Construction Compliance -- with whom many CFHI borrowers had contracts to build their homes.
• Regulatory investigation of CFHI's operations. The FDIC and Florida bank regulators have recently completed an examination of CFHI and "are conducting an ongoing investigation of its operations."
• Shareholder lawsuits. CFHI is being sued by shareholders who allege that it "materially mislead the investing public by issuing false and misleading statements and omitting to disclose material information concerning CFHI's operation and performance of its residential lending department, particularly as it related to these loans."

And while I would not fault an investor who chose to take a 77% profit by covering an April 4th short position on CFHI, I think it will decline further. Do you agree? Do you have any short candidates you'd like me to examine?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Coast Financial.