Here's How This Rally Continues

On the back of small losses yesterday, stocks opened higher this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow (DJINDICES: ^DJI  ) gaining 0.5% and 0.46%, respectively, as of 10:05 a.m. EST.

Show me the money!
On Wednesday, this column identified leveraged buyouts and corporate mergers and acquisitions as a potential driver of further stock market gains. However, that highlights a broader reason for which this rally could last: corporate cash piles. As the earlier column noted, S&P 500 companies held $1.23 trillion in cash and cash equivalents on their balance sheets at the end of the third quarter of 2012 -- a 6% increase from a year earlier.

Half of the top 10 companies with the largest cash holdings are in the information technology sector. Notably, all five have cash that exceeds their debt, while only one of the non-technology companies -- Chevron -- can say the same.

At $137 billion, the largest cash pile belongs to Apple (NASDAQ: AAPL  ) -- and it has not gone unnoticed. On Thursday, hedge fund Greenlight Capital, led by high-profile investor David Einhorn, said it was suing Apple in order to prevent the company from blocking the fund's motion requesting that the company issue preferred shares. Einhorn claims that if the company were to issue $50 billion in perpetual preferred shares paying a 4% dividend, it would cost the company just $2 billion annually while unlocking about $30 billion -- $32 a share -- in value.

Apple holds two-thirds of its cash in overseas subsidiaries, and repatriating that portion would incur a hefty tax bill. Even that obstacle is not stopping Dell (UNKNOWN: DELL.DL  ) : Late on Wednesday, the PC manufacturer made a regulatory filing related to its recent plan to go private, according to which it aims to repatriate $7.4 billion held overseas to help finance the transaction. As of Nov. 2, Dell had $11 billion in cash and equivalents, nearly all of which is held outside the U.S.

As cash balances increase, the pressure on companies to deploy that cash will also rise -- assuming the economic environment continues to normalize. Whether through share buybacks, dividend increases, or corporate M&A, that cash could be the fuel for further stock market gains.

Are you at ease...or nervous? It's been a great five-year run for investors, with the Dow and S&P at or near all-time highs. Yet fears abound. When will the next downturn hit? Will political gridlock lead to portfolio-killing inflation? To learn how to protect your portfolio, click here for free guidance from the Motley Fool Pro Academy!


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