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Apple’s cash is already burning a hole in Wall Street’s pockets

The $76 billion Apple reported last quarter could grow to $136 billion by the end of 2012

Apple's (aapl) fourth fiscal quarter doesn't end until next week, but Morgan Stanley Katy Huberty already has her eye on the company's massive holdings in cash and marketable securities -- $76 billion at the end of Q3, which she estimates will swell to $94 billion by December and $136 billion by the end of 2012.

And like many institutional analysts (see Don't be fooled by calls for Apple to declare a dividend), Huberty thinks she knows exactly what the company should do with all that scratch.

"Repurchasing shares or initiating a dividend is the best use of Apple’s excess cash for shareholders," she wrote in a note to clients issued Monday. "Using over 40 years of stock performance and capital deployment data from our U.S. Equity Strategy team, we conclude buybacks or dividends would be most accretive to shareholders in the long term."

What Huberty doesn't mention in the text of her report is that by "shareholders" she means Morgan Stanley and the other institutions that hold 70% of Apple's shares. You have to get to the fine print in the "disclosure" section to learn that ...

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"As of August 31, 2011, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Apple, Inc., DELL, EMC Corp., Seagate Technology, Western Digital."

It's not clear from that sentence exactly how much Apple stock Morgan Stanley owns. But with 927 million shares outstanding, 1% of Apple would be worth than $3.5 billion at Tuesday's opening price of $382.14.

Huberty writes that she believes Apple is "more likely than ever" to return cash to shareholders, either as a dividend or a stock buyback.

Asmyco's Horace Dediu disagrees. In a 57-minute Critical Path podcast called "It's Good to Be King" he laid out what strikes me as the most sensible use of that money -- and the one that most closely aligned with the interests of Tim Cook, Apple's new CEO.

Dediu's conclusion: Apple's biggest problem right now is not that it's holding too much cash. It's figuring out how to build iPhones and iPads fast enough to meet demand.

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