Stocks are Cheap Compared to Bonds: Hedge Fund CEO

One of the biggest, most influential players in the credit and the distressed debt markets is Steve Tananbaum, founder and CEO, of Golden Tree Asset Management. The hedge fund has more than $12 billion in assets.


"There is definitely different views in the credit market out there between what the corporate debt markets are saying and what the equity markets are saying, and it's beginning to narrow in the last month or six weeks," Tananbaum told CNBC on Wednesday.

"If you look at where spreads are, even where yields are, they are at relatively normal levels. Where if you look statistically, equities are pretty cheap, if you believe the forward earnings," he said.

"For corporate debt there is kind of a tug-of-war between what yields are and what spreads are. Spreads are still pretty wide, above average. Yields are pretty much as low as they've been in leveraged credit," Tannanbaum said.

For this reason, the hedge fund manager is positing portfolios in certain industries.

"Take hospital stocks, pretty much you can go across the board and the credit markets would finance 100 percent of the market cap of pretty much all the hospital stocks," he said.

"You see that in cable, now Comcast and Time Warner Cable would be too big of a deal for the market, but the credit markets would support six times debt where the equity markets are valuing them at five times," Tananbaum said.

"If you look over the last 25 years, only in 1987 did you have the S&P earnings yieldbe the same as the high yield. So right now the debt markets are much more expensive than the equity markets," he said.

So how does Tananbaum think this will all resolve?

"I believe that the equity market will join the debt markets because you are going to have people and this is a very good environment for activists to get in and encourage companies who have underleveraged balance sheets to change the composition of debt and equity," Tananbaum said.

The CEO is also looking at the endgame of some distressed companies, like Lehman Brothers, whose bankruptcy is still going on.

"This is the biggest bankruptcy ever and still has very interesting returns and if you look there are many different parts of Lehman Brothers." he said.

"There are many different boxes in Lehman Brothers and certain boxes like BV—bet on what your claim is worth relative to another claim—we feel this is particularly attractive," the CEO concluded.

Disclosure:Comcast has agreed to buy 51 percent of NBC Universal, which includes CNBC, from General Electric and is awaiting regulatory approval for the acquisition.