The Fed did nothing on interest rates today and their statement was unrevealing and perhaps was meant to demonstrate that they’re cool.

However, they caught bears flatfooted with a subsequent report/rumor of an AIG bridge loan [see late-breaking news below].

The Fed has also injected $140 billion in the past 24 hours. I don’t know if that includes $87 billion to JPM who are being reimbursed for an advance to LEH to settle trades. A lot of this money goes to trading desks and you can connect the dots.

Some say the Fed itself is the source of rumors and that’s part of their micromanaging strategy. But this line from Cool Hand Luke comes to mind: “Yeah, well, sometimes nothin’ can be a real cool hand.”

Some say the Fed must save AIG since its collapse may take the entire financial system down. You must wonder why the government chooses to help one company and not another. With AIG, the “too big to fail” mantra must be so.

What’s left in the Fed’s wallet? Are they broke yet?

All that said, stocks rallied since trading desks were loaded with all that Fed money to play with and with AIG hopes buoying bulls. It’s reported that 58% of volume on the NYSE was AIG. Nevertheless, volume was very heavy but breadth was unimpressive, negative for the most part, despite the “feel good” headline rally.

Breaking news from Bloomberg is that the Treasury and Fed are considering a conservatorship for AIG. Great! Maybe we could create another cabinet level agency as a trash can for private market trash. Politicians love creating another agency. More patronage and civil servants is their cup of tea. Bill Gross loves the idea since Pimpco owns a lot of you know what. That news isn’t sitting too well in After Hours trading:

Another problem surfacing late is the rumor that Vanguard’s Reserve Primary Money Market fund broke a $1 a share given Lehman exposure. I don’t know if that’s true but that’s supposed to be safe ready money.

So rumors dominate the action. This creates volatility and launches program trading activity from nervous trading desks and hedgies.

There’s nothing wrong with carrying high cash balances in this environment and that’s precisely what we’re doing.

Have a pleasant evening.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: SDS, QID, SMN, SIJ, SDP, IEF, TLT, EFA, EFU, EEM, EEV and FXI.

Last 5 posts by David Fry

• POST HOLIDAY COMMENT December 26, 2008 We went to the Pase del Ni#241;o Viajero (Christmas Eve Children#8217;s parade) in Cuenca, Ecuador. - December 26th, 2008
• MARKET COMMENT December 22, 2008 This is no way to start the holiday week is it? - December 22nd, 2008
• MARKET COMMENT December 17, 2008 Other than the ongoing bond bubble, the abrupt fall in the dollar is other big story now. - December 17th, 2008
• MARKET COMMENT December 16, 2008 Bernanke is living up to his reputation as helicopter drops of cash will rain on markets until his academic research is vindicated. - December 16th, 2008
• MARKET COMMENT December 15, 2008 It shouldn#8217;t surprise that scapegoats are being sought to blame for market declines. - December 15th, 2008