When someone is making up a bunch of bull shit right on the spot. Usually done when the person has no idea what they are talking about.
"Who stole my ipod???"
"I don't know maybe some leprechaun, came in the middle of the night and then pranced down the street singing I stole your ipod!"
"Dude i'm just pulling shit out of my ass, if you wait a little bit i'll get you a bigger pile..."