Generating Alpha Using CEFs | Seeking Alpha

The volatility in the CEF market has been enormous over the last few weeks, so many CEF investors have done well just by managing to hang on to their holdings and picking up a few bargains in the process. Now that market volatility has largely subsided, income investors can finally take a deep breath and think about longer-term sources of return. In this article, we review four types of additional sources of return above and beyond the beta of their existing portfolio holdings.

Our main takeaway is that in the current environment, we see most alpha potential in relative value opportunities and term funds. We highlight the First Trust Senior Floating Rate 2022 Target Term Fund (FIV) as an attractive pick in term funds as well as the PIMCO Income Strategy Fund II (PFN) as the relative value pick over the Corporate & Income Strategy Fund (PCN).

1. Term Funds

We covered term funds in more detail here. In relation to their more numerous perpetual funds, term and target term CEFs have a number of pros and cons, so they often suit different investment styles.

On the con side, term funds present a few additional risks. First is the possibility that the fund extends or cancels its termination date, as has happened a number of times. This may lead to a widening in the discount and price weakness. Secondly, term funds that go ahead and terminate are likely to deleverage and reduce risk into the termination, which will dampen earnings. And thirdly, funds in the process of termination may need to sell down some or all of their portfolio in the secondary market taking on the prevailing bid/offer spread. This risk is real but it is often overblown, as we have seen funds holding very illiquid assets terminate without taking on any undue cost that is observable in the NAV.

In addition to the risks, term funds provide certain benefits. In particular, the term fund structure of the fund provides two kinds of risk management. First, the fund’s discount should be constrained by the termination date, which provides an anchor of zero. In practice, this means that the fund’s price should outperform perpetual funds during drawdowns, all else equal. In an earlier article, we showed how the drawdowns of term funds were much more restrained in March. Secondly, term funds typically hold assets with lower duration, which makes them more resilient during drawdowns.

The most important benefit of term funds in the context of this article is the fact that they can provide a return tailwind if they are trading at a discount. For example, a term fund two years away from termination trading at a 4% discount will provide a 2% per annum return boost net of price moves as a result of its discount compression towards zero on the day of termination.

We recently introduced a new term CEF metric on the service which gets to the heart of alpha-generation in CEFs. This is the historic pull-to-NAV yield, which is an analogue of a pull-to-par concept for bonds. It is basically the current fund discount divided by the number of years to its termination, and is a measure of the additional yield an investor in the fund enjoys through the discount moving towards zero on the termination date. It’s not a perfect analogue to pull-to-par, since the term date can sometimes be extended or even cancelled. However, used appropriately, it provides a very good estimate of additional performance.

Source: Systematic Income Investor CEF Tool

We calculate this metric across all term CEFs. The highest pull-to-NAV yield does not mean the fund automatically ends up on our Focus List, however. Instead, we evaluate this metric in relation to the quality of the underlying portfolio.

Source: Systematic Income Investor CEF Tool

We currently feature 5 term CEFs on our Focus List, more than perpetual CEFs. This is for two main reasons. First, it reflects our cautious stance in the current market after the huge run-up we have seen across various asset classes. And secondly, it is because we still find the level of pull-to-NAV yield very attractive.

The fund with the highest pull-to-NAV yield on the Focus List is FIV. It closed Tuesday at a 7.9% discount and a 3% current yield with a 4.73% pull-to-NAV yield. Part of the reason FIV has maintained a wide discount for a term fund is because of its low current yield, which hides the fact that its earnings yield is actually well above 5%. The fund’s leverage is around 27%, so it is still kicking off a healthy amount of income. It is also a higher-quality choice in the Loan sector, with nearly 50% of the portfolio allocated to the BBB/BB rating buckets vs. just 29% sector average. All in all, for the underlying risk, the fund’s all-in yield (earnings yield + pull-to-NAV yield) of over 10% is very attractive.

2. Relative Value

We discussed our approach to relative value in CEFs in more depth here. In brief, the reason why relative value or rotation opportunities work so well in the CEF space is that many CEFs, particularly those managed by the same fund company, run very similar portfolios. However, for technical reasons, the discounts of these funds can oscillate widely relative to each other.

One of the more obvious pairs that we have highlighted in the early part of the year was the pair of the PIMCO Municipal Income Fund III (PMX) and the PIMCO Municipal Income Fund II (PML). The discount spread between these two funds approached 20%, which didn’t make sense to us based on the underlying characteristics of the two funds. Since then, we have seen a steady narrowing of the spread to what is a more reasonable level.

Source: Systematic Income Investor CEF Tool

Another PIMCO pair we are keeping an eye on is PCN and PFN.

Source: Systematic Income Investor CEF Tool

Recently we have seen sharper deleveraging in PCN than in PFN, so that PFN now carries significantly higher leverage.

Source: Systematic Income Investor CEF Tool

This means that the distribution coverage and UNII gap between the two funds should start to close, which appears to be already happening, based on April figures. This should be a prelude to discount compression between the two funds and the outperformance of PFN over PCN.

Source: Systematic Income Investor CEF Tool

3. Activist Pressure

We discussed CEF activists in more detail in this article. In short, activist investors try to influence CEF boards through efforts like electing board members and proxy battles to carry out various shareholder-friendly activities such as share buybacks, fund liquidation, tender offers and others. This is all done with the express purpose of fund price appreciation, typically through discount tightening.

Activist funds initiate their battles by acquiring a sizable portion of the fund in order to exercise a meaningful vote. Because sizable fund holders need to disclose their positions, investors can follow the activities of activist funds through various SEC filings.

Saba is probably the most active, so to speak, of the activists. Below is a list of their 13D/G filings in May.

Source: Systematic Income Investor CEF Tool

Keeping an eye on Saba can also be done through the holdings of their Closed-End Funds ETF (CEFS). Their top two holdings are related to their well-publicized battle with Western Asset / Legg Mason.

Source: Systematic Income Investor CEF Tool

Investors can piggyback on activist positions to ride out the battle. However, just because an activist is involved in a CEF does not necessarily make it a slam dunk for the simple reason that the activist may not succeed or they may bail out of the fund if they have already gained a decent return rather than stick it out to the bitter end.

The way we like to use activist positions is to marry them with funds where we already have conviction. At the moment, there are no obvious choices which we like. For instance, the largest position in CEFs is the Western Asset Global High Income Fund (EHI). The fund closed Friday at a 5.2% discount, which was at the 99th percentile. Secondly, the fund holds a third of its portfolio in single-B and CCC-rated securities, which are not exactly risk-free. Some of the largest positions are in Russian-ruble denominated Russian government bonds, Indonesian USD-denominated bonds, Petrobras bonds and others. The 5% of upside for this type of exposure is not an obvious risk/reward. Furthermore, the 5% upside is really the ceiling of the alpha opportunity, since we really need to probability-weigh it, as it is not guaranteed that Saba will succeed.

4. ETF / CEF Rotation

Finally, investors can rotate between CEFs and ETFs of the same sector based on yield differential and CEF discount valuation.

As an example, coming into the recent drawdown, CEF sectors offered historically low levels of additional yield over and above sector ETF benchmarks. This was due to the combination of high leverage costs as a result of higher short-term rates and also tight discounts.

Source: Systematic Income Investor CEF Tool

This offered a good reason for CEF investors to rotate into ETFs, as the opportunity cost of not being in CEFs was very low. Since then, the yield differential has moved higher, driven by both decreasing leverage costs and lower asset prices. Over the coming months, particularly if the economic recovery continues, we expect further tightening in the yield differential between CEFs and ETFs, offering further opportunity for investors to start reallocating back to ETFs.


With financial market volatility back to reasonable levels, CEF investors may be thinking about other opportunities besides the beta provided by their portfolios. We discuss four types of ways CEF investors can add alpha to their portfolios. In the current environment, we see most alpha potential in relative value opportunities and term funds.

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Disclosure: I am/we are long FIV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Airline Round-Up In Coronavirus | Seeking Alpha

Let us begin with what should be an obvious conclusion: Airlines are an incredibly volatile investment option at this point. An industry that has (through massive consolidation over the past two decades) developed capacity discipline, which led to the most profitable decade in the history of aviation, brought to its lowest point over the course of a turbulent few weeks.

You can forgive airline CEOs for the feeling that the era of bankruptcies, every economic downturn, was a thing of the past: profits had become stupendous, enticing even longstanding aviation-nadir Warren Buffett to lay down a massive bet on the future of the airlines. No one foresaw a worldwide pandemic shuttering the entire transportation industry.

A once-in-a century catastrophe is a hard thing to see coming and impossible to plan for fiscally. So it is that an entire industry was brought to its knees in a matter of a few weeks. There are plenty of Monday morning quarterbacks to question every move that the airlines have made with FCF over the past decade of profitability, but none of that is useful to an investor now. The question is one of future prospects: we already know that the airlines have been decimated by COVID-19, now we need an effective crystal ball to figure out what comes next.

Furloughs, early out options, reduction in headcount

Employment for network and low-cost carriers stood at 534,767 in July 2001.But 4 years later, in July 2005, employment had fallen 28 percent to 383,859. This drop was driven by a decline in employment by the network carriers compared to increased hiring by low-cost carriers. Network carrier employment fell by 34 percent, from 465,198 in July 2001 to 308,714 in July 2005.

During the early days of coronavirus, the immediate response from airline executives was that the sudden drop in passenger demand was a short-term problem: passengers – the thinking went – were not afraid of flying like after 9/11. There would be a snap-back return in demand as soon as the impact of the virus waned. In hindsight, this was hopeless optimism: referring to a nearly empty glass as half-full.

It took a month before full acceptance of the situation was realized: this was worse than 9/11. People were not afraid of flying per se, they were afraid of being in close proximity to total strangers. Social distancing is simply impossible in commercial aviation. Even though no current outbreaks have been traced back to a particular flight, there is little question that the velocity of worldwide spread was the result of the rapid global movement produced by aviation.

There is little question that airline demand will be off for several years. Historical examples are nonexistent as it relates to demand curves following a worldwide economic shutdown, so the slope of the curve is a guessing game. Still, though there is no perfect predictor, a combination of the demand effects of 9/11 and the Great Recession provides the cleanest comparison for future predictions.

Less than Half Empty

Boeing CEO Dave Calhoun recently predicted a major airline will go bankrupt as a result of his assertion that passenger traffic will be below 25% of 2019 enplanements through September. Further, Calhoun expressed skepticism that traffic levels would exceed 50% by the end of the year. There is, perhaps, a bit of schadenfreude to Calhoun’s nihilism: Boeing was already in the midst of one of the most turbulent years in its existence. Misery loves company. The complete shutdown of capital expenditures in aviation does not bode well for Boeing, who suddenly has all the time in the world to get the 737 MAX recertified.

There is no precedent for the sustained decrease in demand for air travel that Calhoun proposes, but there is also no precedent for a virus that shuts down massive parts of the economy worldwide. Maybe Calhoun is correct, but without a firm basis for his assumption it remains a wild guess – and one that does not appear to have any basis except that of current lousy conditions. For some context, within three months of 9/11, domestic and international flying had returned to better than three quarters of pre-9/11 numbers. Within six months, both stood around 90%.

Of course, this is a different situation: not only is there a broad social reluctance to travel in close proximity to strangers, the economy is all but certain to reach the depths of the Great Recession, if not touch unemployment numbers not seen since the Great Depression. The present situation likely represents a combination of the adverse impacts of 9/11 and the Great Recession rolled together. The one-two punch feeds into the skepticism of Calhoun for a V-shaped recovery. Calhoun is not alone: Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) clearly came to the same conclusion when they divested all of their airline holdings at a sizable loss.

Delta Air Lines (DAL) recently sent a communication to their pilot group announcing that the carrier was anticipating a surplus of 7,000 pilots through the end of the year. This number falls more or less in line with Calhoun’s 50% year-end scenario. Due to the complexities of first furloughing and then retraining pilots once they return, Delta noted that their furlough plans were predicated on demand projections for summer of 2021: in this case, they anticipated between 2,500 and 3,500 excess pilots. This represents around a third of their staffing at the pilot position, which in theory should equate to their expectation of passenger demand: around 67% by next summer.

United Airlines (UAL) has begun the furlough process through a displacement of their pilot group (no one can be furloughed under the terms of the CARES act until October 1st, but this does not prevent the airlines from preparing for such a furlough). The displacement produces the potential for a draw-down of 3,000 to 4,000 pilots. This is a bit more pessimistic than Delta’s numbers, but not by much.

Preserve Cash, No Matter What

If this seems (from a historical perspective) a bit pessimistic, it is. The low point during the Great Recession saw domestic air travel at 90% of 2006 enplanements. The average during the multi-year recessionary dip was 94%. Interestingly, international travel during the Great Recession was (for the most part) at or above pre-recession demand levels: the average for international travel was 104% from 2008 through 2012. Only four months total recorded 3% or more below peak values. (Click here for documentation of pre-9/11 and Great Recession airline demand levels).

If you combined the effects of 9/11 with the Great Recession, mathematically you would wind up around 85% of pre-crisis capacity by the end of the year. That is a difficult number to envision given the recent single-digit numbers being posted daily by the TSA, but it provides a hint at a critical question as it relates to the return of demand: how essential is air travel to businesses and individuals? Are the economic and personal incentives to travel so slight that demand levels below 25% can persist for several months?

Social Conditioning

There is little question that social distancing and nervousness surrounding coronavirus have produced strong incentives for individuals to avoid unnecessary travel, yet there are also many strong incentives that prompt individuals and companies to travel in the first place. There are no iron-clad numbers to sort out how much business travel can be replaced (albeit imperfectly) with video conferencing apps such as Zoom (ZM), or simply put off altogether. Yet, it should be clear that a good portion of business travel reflects the economic necessity of continued profitability. With nearly all businesses feeling the pressure of a couple months of restricted cash flows, there will be a strong financial incentive to do what it takes to return to productive business activity. For some businesses, this requires air travel.

In reality, these numbers will be highly influenced by the development of treatments and vaccines to COVID-19. Still, 25% by September seems far too low: the low point measured by TSA screening was 3.6% of 2019 numbers on April 16th; a month later, on May 16th, that had increased to 9.3%. That is a 260% improvement in a month. By May 22nd, it was 12.5%, already half of Calhoun’s 25% forecast: in a bit over a month there has been a 347% rebound in demand. It is impossible to believe that the remaining three-plus months until September will fail to do more than another 100%. States have just barely begun the process of limited reopening; it is difficult to believe that the growth trajectory of airline enplanements will flatten out as more and more states open up.

The downside for airlines is obvious here: relaxing restrictions at the state level has the potential to result in a resurgence of COVID-19 cases, though there is an implied consensus among epidemiologists that COVID-19 will wane over the warmer summer months. It will not completely go away, and a resurgence in winter is all but a given, but summer has the earmarking of a temporary reprieve to total social isolation.

If anything, September may represent the high point for the rest of the year. I would not be surprised to see travel over 60% going into September. But, like pretty much everyone else taking a stab at it right now, that amounts to a wild guess. Still, color me shocked if it is 25% or less.

With a vaccine well within the realm of possibilities by next summer, I would expect something much more like Great Recession demand at that point: better than 90% demand of pre-coronavirus levels. Perhaps people will still be hesitant to travel due to the lingering effects of a year’s worth of social distancing, but this should largely be offset by those who are anxious to escape their shut-in confinement. From this regard, betting on the airlines may be something like betting on oil companies: the extreme imbalance between supply and demand is going to result in a huge rebalance on the supply side. Neither industry can simply flip a switch to turn supply back on after it has pulled back sharply – not the least because of debt overhang and a likely paucity of investment dollars.

Expect a supply-demand imbalance to be in place this time next year – this time with a serious deficit of available seat miles. The airlines are in cash flow preservation mode, which means that they will likely undershoot on their demand forecasts for next year: with little leverage in the debt markets, they simply cannot afford to carry excess capacity. The long pole at that point will be retraining pilots and recertifying aircraft: it is not a simple or short process to return a pilot or airplane to revenue flying, following an extended absence. With several airlines hinting towards 30%-plus reductions in capacity, the airlines could be sharply back in the black by as early as Q2 2021.

Oil prices may be a bigger factor in 2021, offsetting some of the supply advantage for airline pricing. Still, with massive cash inflows from the federal government, most of the airlines should be able to make it through the winter to the relatively fat months of post-COVID-19 life. And while the grants recently awarded to the airlines only covered roughly 70% of payroll costs until October 1st (the earliest that airlines can furlough under the CARES act), every airline has instituted voluntary leave and separation packages. A significant percentage of employees for several airlines have taken leaves, significantly reducing payroll costs. The continued return of flying over this summer has the possibility of covering some more of those variable costs. Payroll, in other words, has a good shot to be fully covered by the grants by October 1st. With labor representing the number one cost for an airline, this is significant as it relates to liquidity.

You can view my video detailing my analysis of the predicted demand effects on air travel caused by COVID-19 here. Follow me on Seeking Alpha for updates on aviation and the rest of the market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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How Innovation Works | Seeking Alpha

It seems like there has been a number of very relevant new books coming out this spring, relevant in terms of subject matter, but also relevant in terms of timing.

I have already reviewed one of these books. “The book is titled ‘Radical Uncertainty: Decision Making Beyond the Numbers’ and has been written by John Kay and Mervyn King. Mr. Kay was the first director of the Said Business School at Oxford University and wrote as a columnist at the Financial Times for twenty years. Mr. King began as an academic, but was later Governor of the Bank of England from 2003 to 2013.”

The book was written before the current pandemic spread throughout the world, but it is very, very pertinent to the environment we find ourselves in right now. In a world of “radical uncertainty,” one has no model of how the world works and, consequently, must attempt to define “what is going on” so that one has a narrative to work from in dealing with what is evolving.

How Innovation Works

We can now add another important book to the list, one that was released on May 19 but was also written before the current pandemic spread throughout the world.

The author of this new book “How Innovation Works: And Why It Flourishes in Freedom,” is Matt Ridley who has written a series of well known books, perhaps the best known is titled “The Rational Optimist: How Prosperity Evolves.”

Mr. Ridley’s book is very pertinent for the age and helps us to focus on an important aspect of moving on into the future. Innovation must play a big role in how things progress.

To get one started on Mr. Ridley’s thinking one can begin by listening to an interview with the author by Peter Robinson, the moderator of the podcast Uncommon Knowledge, which originates through the Hoover Institution. One can access the podcast at this location.

Mr. Robinson identifies, right at the start, Mr. Ridley’s definition of innovation as “enhanced forms of improbability.” This idea is quite similar to the concept of radical uncertainty in that it claims that innovation is created by individuals who don’t have a roadmap or a pathway to discovery.

After the fact, the roadway taken can be clearly defined, but when starting out, one has little conception of what the end result might be. And, it is in most cases, a long, slow path to fruition, one that can involve many, many people.

Innovation Is A Story

Mr. Ridley tells a lot of stories; he builds a narrative. This is the essence of radical uncertainty.

Innovation, like evolution, is a process of constantly discovering ways or rearranging the world into forms that are unlikely to arise by chance—and that happen to be useful.”

Innovation is potentially infinite because even if it runs out of new things to do, it can always find ways to do the same things more quickly or for less energy.”

The surprising truth is that nobody really knows why innovation happens and how it happens, let alone when and where it happens next.”

And, Mr. Ridley builds on these ideas: “Innovation is nearly always gradual”; “innovation is a team sport”; “Innovation is different from invention”; “Innovation is often serendipitous”; Innovation is recombinant”; Innovation involves trial and error”; and so on and so on.

And, Mr. Ridley fears, innovation is slowing down…at least in the United States. And, this brings up the new competitor…China. China is now innovating “with gusto” and the United States must pick up its game. In this, the United States must “regain its momentum.”

And Here We Must Look For Our Future

Mr. Ridley shows through his stories that the “real” innovation takes place outside the large organization. And, this I think is very important for the future of innovation in the United States.

I have worked with young entrepreneurs for a long time.

I have never been a young entrepreneur myself, but I have worked with young entrepreneurs as a banker, as a angel finance person, as a venture capital person, as an academic, and as just an interested party who really enjoys working with these young, intelligent, ambitious, and persistent people.

I have seen a lot of changes over the years. The last ten years have been particularly interesting given the changes in the economy and the technology since the Great Recession.

But, I have never seen the degree of activity and drive to change things as I am now experiencing. This must be encouraged and expanded. We must lead from here.. I believe that these changes are going to make a huge difference in the way things are evolving and are going to produce a connected world that we can’t at present, comprehend. Just two examples of what is happening.

Current Opportunities for Building A Company

One example of this that I have had the opportunity to work with in this space is associated with Penn State Harrisburg and is called the Penn State LaunchBox, formerly called the Penn State Center for Innovation and Entrepreneurship.

This operation provides all sorts of resources for the young entrepreneur in order to help spur on economic development. It provides startup coaching and training, free co-working space, access to legal resources, access to mentor-ship, and technical support through connections with the faculty of Penn State University and with its students. They also offer

Over the past twelve months I have done some “consulting” with the accelerator programs, like its Idea TestLab and their Startup Challenge program. These efforts provide intensive assistance in developing and building unclear of unknown business models. So far over 50 startups have graduated from these programs.

One thing that keeps me coming back to opportunities like these is the energy and engagement, along with the intelligence and drive that these young people bring to the effort to turn their ideas into reality. Bringing just as much or more energy and engagement to the center is Ms. Annie Hughes, director of the operation, who was formerly a brand manager of disruptive innovation at the Hershey Company in Hershey, Pennsylvania and brings insight and experience to the aspiring innovators. She knows what she is doing!

It is efforts like these that are helping to create the “new’ normal, because this effort is just one of many initiatives within the Susquehanna Valley in Pennsylvania. But, I can also attest to all that is going on in Philadelphia as I participated in many initiatives in that space as well.

It is an exciting future these young people are bringing to the world.

Bottom Line

Mr. Ridley, throughout, makes the case for freedom and the spread of information. Innovation is dependent upon the spread of information and the United States must do it best to encourage and support the growth and spread of information. This, to me, was what was so dynamic about the last half of the twentieth century. The environment was right for the growth and spread of innovation.

If the United States is to meet the challenge it is facing from China, it is going to have to renew this spirit and support efforts, like, for example, the work that is being done at Penn State Harrisburg, And, this work must be connected with the work that is being done elsewhere so that individuals can build and grow together. Only in this way will America remain globally competitive.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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CEL-SCI: What’s Next (NYSEMKT:CVM) | Seeking Alpha


CEL-SCI (NYSEMKT:CVM) is a small-cap market (~$600 million) clinical-stage cancer biopharmaceutical company. It has two products in the pipeline: Multikine and LEAPS.

Multikine, a cocktail combination of cytokines and chemokines, is a prospective neoadjuvant treatment and an investigational drug candidate in Phase III event-driven clinical development for newly diagnosed advanced primary head and neck cancer.

The goal of Multikine is to boost the body’s immune system prior to Standard of Care (“SOC”). The event-driven Phase III study was fully enrolled with 928 patients, and the last patient was treated in September 2016.

To prove an overall survival benefit, the study required CEL-SCI to wait until 298 events (deaths) have occurred among the two main comparator groups.

298: The Long Journey Is Over

The nearly 10-year Phase III journey is now over, and what a journey it was. On 5/4/20, CEL-SCI announced that the 298th event occurred, ending the nearly 10-year Phase III trial of Multikine.

The press release said a lot:

The database is now being prepared for database lock. Once the database has been locked the final analysis of the trial results can be performed. CEL-SCI will continue to remain blinded to the study results throughout this process. CEL-SCI will be advised of the results when the analysis is completed and the study results will be announced to the public and investors at that time.

The CROs involved in study management are generating the remaining queries, performing source data verification, completing medical review, and building the final database needed to produce the final tables, listings, and figures.”

For large investors and funds that have been sitting on the sidelines, this is the long-awaited signal to buy stock. Many investors have avoided investing in this “never-ending” trial, choosing to invest elsewhere. Now is the time to start their positions, as data won’t be too far away.

What Happens Next

Our research with Event-Driven trials is that they need to complete many follow-up steps after the last event is reported. Finalizing steps include:

‣ Follow-up safety visits

‣ Adjudication of events

‣ Follow-up with discontinued patients

‣ Database lock

‣ Analysis of primary and secondary endpoints

‣ Full review of dataset and safety results

Once the full dataset is released and is positive, CEL-SCI will meet with the FDA and other regulatory authorities to develop a plan for the submission of a biologics license application (“BLA”).

The Study Took Nearly 10 Years To Complete

Standard of Care and Our Analysis

Some readers might say that the reason for this “delay” is because Overall Survival (“OS”) for head and neck cancer has improved over the years. This is categorically wrong.

Basic internet searches will not provide the exclusion/inclusion criteria that are needed to determine the estimated OS. One must dig deep into the SEER database. CEL-SCI recently hired an External Statistical Group to do just that – determine the exact OS using the exact study population.

The biggest takeaways here are the “terrible” OS statistics for this study population: 3-year OS – 47% and 5-year OS – 37%. The trial assumed a survival rate of 55% at Year 3. The actual OS is 8% lower than what was estimated.

This is consistent with the American Cancer Society’s recent declaration on 1/8/2020:

Death rates rose over the past decade for… sites within the oral cavity and pharynx.”

CEL-SCI’s independent analysis is consistent with the American Cancer Society’s assessment: survival for the study population has decreased and can’t be the reason for the “delay”.

Our own survival analysis is striking and we can’t avoid the obvious. The statistics are showing an efficacy well over 10% in every one of our scenarios.


Yervoy All Over Again

Bristol-Myers Squibb (BMY) faced a similar “delay” in its Phase III trial for the blockbuster cancer immunotherapy drug Yervoy. Yervoy is an entirely different immunotherapy and indication than Multikine, but there are striking similarities. Both are Event-Driven studies, for example.

BMY became keenly aware of the challenges associated with Event-Driven studies. In February 2016, Tai-Tsang Chen, PhD Executive Director of Global Biometrics Sciences at BMY, gave a keynote presentation about Event-Driven studies.

In the presentation (Slide 10 shown above), Dr. Chen made the following observations:

  • BMY anticipated that all the events were to have occurred within three years.
  • Three years into its study, only 85% of the events had occurred.
  • However, what is most telling is that it took two additional years for the remaining 15% events.
  • Events began to trickle in and showed a very different survival curve than “standard” cancer treatments.

This is what we believe happened with Multikine: a decreasing event rate due to the “delayed clinical effect”.

Bears: “The Trial Has Already Failed!”

We have heard many times over the years that “the trial has already failed”. This despite countless Independent Data Monitoring Committee (“IDMC”) reviews and FDA clearance.

The original CRO, Inventiv (VTIV), did not perform; in fact, it was negligent in its duties. CEL-SCI “sued” Inventiv, and Inventiv was found guilty of material breach of contract – a first in the biotech industry. From the PR:

This is a final and binding decision and to CEL-SCI’s knowledge, marks the first ever decision in favor of a biomedical company against a CRO for breach of contract”

The arbitrator also found that Inventiv knowingly misled CEL-SCI with respect to “enrollment projections”, which, in the arbitrator’s opinion, was “fraudulent”. In addition, the arbitrator assessed Inventiv for the entirety of the arbitrator’s fees for the arbitration as a result of Inventiv’s “scorched earth litigation tactics”.

Inventiv really messed up the first few years of the trial. This had serious ramifications and affected many things, as well as the length of this study. We will discuss some of these ramifications below.

CEL-SCI has had a bumpy journey, to say the least. There was a brief clinical hold in 2016. The FDA reviewed the study and then released the hold with no changes to the protocol. It was lifted as it had a “likelihood of meeting the statutory requirements for marketing approval”.

This is no small thing. Remember, the FDA is responsible for protecting public health by ensuring the safety, efficacy, and security of human and veterinary drugs, biological products, and medical devices. The FDA doesn’t release holds without a very good reason.

However, the bears will say that the hold was released because CEL-SCI would no longer dose patients with Multikine due to safety concerns. This is categorically wrong.

This is our take: this CRO transition was likely messy due to the multiple clinical sites across the globe and the lack of incentive for the first CRO to make a smooth hand-off. The IDMC has a regulatory and professional responsibility to monitor the integrity of the trial and safety of the participants. During one of the early IDMC reviews, they were provided data that indicated that the first CRO (Inventiv) deviated from protocols that the new CRO (Ergomed) was in the process of cleaning up.

The result of Inventiv’s mismanagement was that the IDMC may have seen some adverse events and protocol deviations. Due to the potential that the data may have been unreliable, they were unable to confidently discriminate the causal factor of the adverse events, and therefore recommended to halt the trial out of an understandable abundance of caution.

The IDMC made their recommendations and the FDA got involved.

Meanwhile, CEL-SCI was trying to manage the Inventiv debacle, so it recruited more than the 880 in the original protocol and subsequently attempted to amend the protocol to increase recruitment further. FDA rules specify that sponsors are expected to submit protocol amendments before implementation of the changes and can only implement changes after the protocol amendment has been approved.

In addition to the other deficiencies noted in the hold letter, the FDA apparently wanted more clarity on the reasons for the protocol breach. The partial and subsequent full hold was initiated until CEL-SCI explained the protocol deviations from the approved IND and proved that the deviations do not materially affect the validity of the statistical analysis. The FDA knew that the hold would not affect the current progress of the study, rather, it simply wanted to ensure that CEL-SCI would not continue to enroll participants outside of the approved IND protocol.

It is important to note that the FDA did not put the trial on full clinical hold initially; they allowed the remaining enrolled patients to be treated with MK. Now, given what they knew about the substantial risks of systemic cytokine therapies, do you think that they would have allowed those patients to be treated if they thought that safety was a realistic concern? It is also very important to note that the full clinical hold was made after these final patients were treated. In this context, the full hold is made by default because the exception to the full hold no longer existed, i.e., all enrolled patients had been treated. In this case, there is literally no category for the FDA to classify IT-MATTERS into except a full hold. The FDA simply didn’t want CVM to enroll any more patients outside of the effective IND protocol without approval, and a clinical hold is the instrument that they have to ensure that.

In August 2017, the FDA reviewed the available data and the hold was fully lifted. A few months later, in December 2017, the IDMC saw no evidence of any significant safety questions and the IDMC recommended to continue the study. In this same month, CEL-SCI announced the study was fully enrolled and all patients have been treated with the investigational therapy and are being followed.

After four recent reviews (August 2018, March 2019, October 2019 and April 2020), the IDMC recommended to continue the trial until the appropriate number of events have occurred.

It is very important to note that, by mathematical definition, none of the IDMC/FDA holds or safety concerns will have any statistical effect on the efficacy analysis. The shorts’ argument that safety will have any relevance to the efficacy calculation is categorically incorrect and underscores their lack of competence in this arena.

The takeaway from this is that the IDMC and FDA appropriately investigated irregularities in the study and equally appropriately elected to allow the study to continue after the questions had been addressed.

Analyst Coverage

On January 13, 2020, H.C. Wainwright initiated coverage on CEL-SCI to Buy with a price target of $18. The stock hit that target in a mere 4+ months.

H.C. Wainwright subsequently increased their price target to $23. We expect to see low $20’s as we approach top line data release very soon.

Russell Index Rebalancing – Major Upside Coming

On May 8, the Russell Index began its annual rebalancing process. It’s a two-month process. CEL-SCI’s market cap will be used to determine its weighting in various indexes. The bigger the market cap, the more shares the indexes need to buy.

Last year, over 2 million shares were bought as CEL-SCI was added to the Russell 2000 Index. With our market cap about 2 times higher as compared to last year, expect another 2 million+ shares to be bought into these indexes. Where will those 2 million+ shares come from? How will this affect the share price? This is a typical supply versus demand issue and will create significant pricing pressure to the upside. The rebalancing culminates in late June.

Lobbying Efforts Continue

CEL-SCI contracted with The Petrizzo Group late last year to lobby the US government about “FDA approval issues of innovative drug therapies“. The company lobbied the U.S. Senate, the U.S. House of Reps, the FDA, the Office of Management & Budget and Health & Human Services. This isn’t cheap. In the last three quarters, CEL-SCI has spent $150K. The first quarter was the first time it lobbied the NIH.


There are 165K new head and neck cancer cases each year in the U.S., Canada, and Europe. Of these, 110K are “advanced” Stage III or IV and are Multikine-eligible.

The average new oncology drug cost is between $200K and $400K. Let us assume a market penetration between 20K and 50K a year, and Multikine only receives $50K per treatment. Annual sales would be between $1 billion and $2.5 billion.

Assuming a multiple of 4x sales, which is extremely conservative, the value of the company would be between $4 billion and $10 billion. Fully diluted by all possible shares plus future potential dilutions (50 million shares), this equals around $80-200 per share.

We are suggesting a fair valuation between $80 and $200 per share, if Multikine is successful. We believe this drug will be a blockbuster.

Given this is a binary event trial, if the trial is not successful, we believe the share price will be around $1.

Risks And Conclusion

Biotechnology is risky, and so is investing in it. A majority of all biotech trials fail, and they always need cash.

As the primary endpoint is the open door to approval by the FDA, we believe there is a very high probability of success for this drug and that CEL-SCI is currently deeply undervalued, given the potential of the drug and the probability of success. A plethora of items are pointing to success:

  • Both the American Cancer Society and CEL-SCI confirm our due diligence: OS has decreased for the trial’s patient population.
  • Based on our statistical analysis, we expect to see an efficacy well over 10%.
  • The “delayed clinical effect” has prolonged the length of the study.
  • The clinical hold ultimately had nothing to do with the safety of Multikine, and both the FDA and IDMC said the trial should proceed.
  • IDMC has reviewed the data and could have determined that the trial was futile, but they said to continue. They see something here.
  • Dropouts are not an issue and appear to be contained.
  • Other clues, like the recent stock purchases by the CEO, lobbying efforts, upgrades to the manufacturing facility, and the large amount of in-the-money warrants, are pointing towards success.

While we strongly believe that this trial should be a tremendous success, there are many aspects of a clinical trial that could be the cause of failure.

Failure could be due to many factors, such as, but not limited to:

  • SOC showing an extraordinary capacity to heal patients.
  • High level of dropouts during the study (well above 20%).
  • Violations of the protocol not detected or reported properly by the investigator.
  • Considerations due to the fact that the trial happened in many countries outside of the USA.

Speculation on this stock may be prudent from the information presented, as it seems likely this treatment will succeed. Those a little less confident may choose to go along for the ride up, if it continues, and sell as anticipation builds closer to a release of information. Those with the opposite belief may cite the company’s past and obstacles to approval.

All those risks do remain, and a wise investor will consider them before making an investment decision. If the trial fails, we would expect the share price to be less than $1.

However, we believe this will succeed. We are again suggesting a fair valuation between $80 and $200 per share.

More details can be found on

Disclosure: I am/we are long CVM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Silver’s Silver Lining | Seeking Alpha

Everyone’s looking for gold. So, I’ll be the one collecting the silver. – Rehan Khan

Source: Yahoo Finance

A couple of weeks ago, I questioned if silver might take some steps to correct its broad underperformance relative to gold. Since then, the former has made some headway in addressing this, with May proving to be a really good month so far. Of course, this outperformance has come over a very small sample size, and I don’t want to jump the gun, but I do think there are some rather interesting conditions brewing for the medium-term prospects of the white metal.

Gold-silver ratio

The gold-silver ratio has almost always been a good leading indicator of how things could pan out in the world of silver, although, it’s fair to say that we might have to calibrate our expectations, given how this ratio has zoomed towards unprecedented levels recently. Up until this year, the long-term average of this metric was around 60, with the 85-90 levels being hit only 4 times over the last 20 odd years (2003, 2008, 2016, and mid 2019). At 100-plus levels, currently, this ratio does appear rather stretched with room for more reversion. Even if you think reversion towards the long-term average of 60 might be a bit of a stretch, I do think there are some compelling fundamental factors (which I expand on below) that could help push the ratio down to the bottom end of the ascending price ratio channel, which is around the 80-90 zone (which would still be overbought by historical standards).

Source: Trading View

Broad supply-demand picture

Source: Silver Institute

Over the last four years, the supply-demand equation for silver has not been conducive for silver prices with a surplus being seen every year. However, what’s encouraging is that the imbalance has really come off from the elevated levels of 62-68 million ounces seen in 2016/2017. In 2020, whilst we are likely to have yet another year of surplus, you’re still looking at a whopping 53% y-o-y drop in the market balance at 14.7 million ounces. The key juxtaposition here is between industrial demand and mine production. Whilst industrial demand had grown at a CAGR of 3% from 2015 to 2019, mine production during this same period came off by -2%, and I don’t think we are too far away from having a deficit situation in silver.

Silver supply

Source: Metals Focus

Mexico remains, by far, the largest producer of silver, making up c.23% of global production. Peru is the other dominant country in this space, and even before the pandemic brought things to a standstill, there were some pretty significant production cuts in both these countries last year. This was mainly on account of declining grades at several large mines and disruption-related losses at some major silver producers.

This year, things have turned for the worse since mid-March, with all the key silver producers being impacted by mandated production suspensions, refinery and smelting disruptions, and transport disruptions. Mexico is still in broad health emergency with lockdowns until May 30th, although mining has been permitted since May 18th, provided a certain mine is located in a municipality with no to few active COVID-19 cases. In Peru as well, one has seen a similar theme, although there has been a gradual resumption of activities since the 2nd week of May, with miners operating at 35-40% capacity. All in all, c.66% of total global silver production was put on hold this year, the most for any metal!

Even for the rest of the year, I’m not sure we can expect a significant ramp up on the production front with big silver mining companies, including Pan America Silver Corp. (NASDAQ:PAAS) and First Majestic Silver Corp. (NYSE:AG), all announcing plans to cut capex and exploration activities.

Silver demand

Unlike gold, silver’s utility in the industrial landscape is a lot more pronounced. Key applications include electronics, automobiles, medicine, solar, water purification, window manufacturing, and brazing alloys. I wrote recently about why we could see a pickup in global industrial production by H2-20 and that should bode well for the prospects of silver with industrial demand accounting for c.55% of total silver demand.

Two silver consumer segments that I am particularly enthused about are the automobile and the photovoltaics segments. Silver’s use in automobiles has gone up considerably over the last decade due to a push towards more electrification (silver is one of the most reflective and best conductors of electricity). Whilst this industry may have been hampered in H1, demand in the large auto markets of the world is preparing for a rebound.

Source: CPM Group

If you look at the supply-demand table above, you can see that industrial demand from photovoltaics has grown very strongly, doubling from 48.4 million ounces in 2014 to 98.7 million ounces in 2019. I believe solar energy is here to stay as it is an inexhaustible fuel source that is pollution-free and one that is fast becoming more versatile and affordable. According to Allied Market Research, we’re looking at a c.21% CAGR industry, poised to hit $223 billion by 2026. An interesting concept that is gaining traction in the US is solar carports. This is one of the most viable options for refueling EVs and is currently in use at several large department stores, federal and state locations. The US Department of Energy has suggested that the country might need c.8000 solar carport stations to provide a minimum level of urban and rural coverage. In addition to a general industrial pickup, as we go greener and vehicle electrification gains momentum, silver demand should inevitably ramp up.

Silver – a less expensive gold proxy for these uncertain times

In addition to the utilitarian value that it offers industries, I’d also like to think of silver as something as a gold proxy. On account of the unprecedented level of recent monetary stimulus that has decimated the value of paper currencies, precious metals such as gold and silver will be increasingly seen as a store of value to mitigate this. Gold, of course, has been the rockstar of asset classes in the recent past, but I think there is greater value to be seen in silver. I expect physical investments in silver to ramp up as investors diversify away from uncertain equities and seek suitable alternatives to cope with a potential reflation scenario. Net physical investment in silver which grew at 12% YoY in 2019 is poised to grow at an even greater rate of 16% this year. Interestingly inflows into silver ETFs have been gaining speed, up 13% YTD. Incidentally, last week, a major ETF – iShares Silver Trust (NYSEARCA:SLV) saw a significant week on week spike of 5.4%, adding 24 million units.

Conclusion and how to play silver

The risk-reward on silver is not as appetizing as it was back in March, and as mentioned at the start of the article, May has been particularly good for this white metal, with silver futures up c.17% on a 1-month basis. That said, as implied by the gold-silver ratio, I still think there is further room for silver to move. Over the medium term, encouraging fundamental factors should keep interest in this metal elevated. If you’re an equity person, you can consider key silver miners such as First Majestic Silver or America Silver Corp. but this would not be my first preference as they also have exposure to other metals and you have to contend with company-specific issues. Besides, these stocks have more than doubled in value since the March lows. My preference would be the ETF iShares Silver Trust that more closely tracks the performance of silver and is still yet to break out of the long-term range.

Source: Trading View

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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