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

• MARKET COMMENT October 22, 2009 DRIVE-THRU SOUP KITCHEN 2009 So, what the hell was yesterday about anyway? - October 22nd, 2009
• MARKET COMMENT October 20, 2009 TAKING A BREAK It was a pretty strange day. - October 20th, 2009
• MARKET COMMENT October 13, 2009 EARNINGS WORRY WARTS I just have a spooky feeling but then I always do. - October 13th, 2009
• MARKET COMMENT October 8, 2009 GETTING SOME ALTITUDE SICKNESS YET? - October 8th, 2009
• MARKET COMMENT October 2, 2009 REALITY BITES BULLS Economic reality is meeting bullish enthusiasm and the results are disappointing and upsetting. - October 2nd, 2009