Many investors believed that the company’s earnings report was going to be today but we do not yet have any formal date for its earnings release.

Is it possible that today’s trading bump in CALL and PUT options was simply a calendar mistake?  This seems odd, but in today’s world and with the way reporting has been out of China the best rule is to not be surprised by anything there any longer.

Baidu’s stock (or ADR) closed down 0.5% at $130.73 and its 52-week trading range is $100.95 to $165.96.

JON C. OGG

CNBC has also just reported that a boutique named Northcoast Securities has issued a SELL rating on the stock.  Apparently they have the same concerns we have on the stock.

There was a BUY rating issued last week and we covered this and many other key analyst calls in the top analyst calls of the week on Saturday morning.

Groupon shares are indicated down 1.2% at $23.95 this morning right before the open.

JON C. OGG

The Federal Reserve has released a report that shows significant improvement in oversight of individual risk, incentive, and compensation.  This matters at firms like Citigroup, Inc. (NYSE: C), J.P. Morgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), Bank of America Corporation (NYSE: BAC), Goldman Sachs Group Inc. (NYSE: GS), Morgan Stanley (NYSE: MS), or any of the other top financial firms.

The top 25 largest financial institutions have shown that over 60% of the pay for senior executives now have their financial incentive on a deferred basis.  The Fed still sees more for room for improvement to avoid incentives that actually put the firms or their capital at risk, but the note is that these financial firms actually went above what was required of them per compensation regulations.  Of those top firms, more than 80% of the pay of the most senior executives has been deferred with added stock restriction periods even after their shares vest.

The 34 page study from the Federal Reserve measured the risk-adjusted incentive plans, the deferred payment methods, and the use of longer performance metrics to base around payouts, and aimed to reduce short-term incentives.

There is a scary, and perhaps even unfair angle to this deferred compensations.  The most common deferred compensation is shares of stock, stock options, or a firm’s earnings or return-on-equity during a deferral period.  The protesters won’t care, but let’s use a basic scenario:

• You are a financial advisor or trader at a TBTF Bank/Broker (take your pick).  You are 57 years old and your deferred pay and your stock options (both tied to company stock in this case) are locked up for three years longer after you “retire” from the firm in a year.  You have $1.8 million in these today.  It is possible to create a collar or a floor with options or derivatives for at least a part of your deferred compensation, but some firms discourage (or worse) the practice and often it may be too expensive.  what if we have a recession (another one) in 2013 or 2014?  What if the states and the federal agencies and counterparties keep suing for things not tied to you at all that were for actions and investments made by others from 2003 to 2008?  The bulk of your nest egg, which you were forced to keep in stock or in financial metrics tied to stock or future earnings.  You have no control over what management does now over what regulations cap the actions and profits of your firm.  What if the stock gets cut in half, or worse?  In many cases, the nest egg is close to being wiped out.

Sure, this was a hypothetical case and the firm name should not matter.  It is not unlike what many described as the deferred compensation plans discussed.  The Europeans have some rules about 60% being tied to the firms’ stocks or the company metrics and the exact methods of deferred compensation vary from firm to firm and often vary from individual to individual.

So, take your anger against wealth or your anger against Wall Street out of the scenario.  Now go back to the lessons of Worldcom and Enron.  Those employees were duped over and over by management to keep buying more company stock.  This wiped innocent workers’ retirements and their cash investment accounts out entirely.  The push from 2002 all the way up until the regulation on financial firms’ compensation was always to encourage employees of a company to diversify away from just investing in the company’s stock.

No one on Main Street will care, but there are too many cases at large financial institutions where this new environment is a double standard.  Imagine you work at one of the Too Big to Fail money-center banks.  Politicians routinely press for the break-up or ask about the possibility of a break-up of the largest banks to reduce systematic risk.  Ben Bernanke said that the authority is more or less already there if needed.  Then what happens to the employees there.  Bankers and brokers and the employees of those companies are probably not thought of well by many, but are these people all bad and did they all contribute to the meltdown?

The regulatory pay covers the big earners of these firms.  They are referred to as senior executives, or employees able to take or influence material risks, or those similarly compensated individuals who can take or influence material risks.

The Fed also admits that this is simply a work in progress and that the full verdict remains unknown.  It noted, “the effectiveness of such practices will not be known until some years of experience have been accumulated. Effectiveness will depend on the attentiveness of members of compensation committees to risk-taking incentives.”

This should only be considered work-in-progress, regardless of what the Fed (and the public) says.

JON C. OGG

The EC is probably naive enough to believe its math.  It claims that this could approximately raise €57 billion every year and it wants to start this tax in January 2014.

The effort from the European Commission in the financial transaction tax is dubbed “Making the financial sector pay its fair share.”  This may remind you of the Congressman DeFazio effort that crapped out here in the United States called “Let Wall Street Pay for the Restoration of Main Street.”  It took effort to kill that silly idea as well, but ultimately common sense prevailed over the killing of incentive.

The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the European Union.   What is laughable beyond the proposal itself is that shares and bonds would be taxed at a rate of 0.1% and derivative contracts would be taxed at a rate of 0.01%.

Wait, a lower tax on DERIVATIVES???  How silly is this?  Investors buying or selling stocks would be taxed more than financial derivatives?  Ok, this moved from poor judgment to senseless!  If you include CDOs the argument might not be true, but financial derivative contracts between institutions brought on far more of the mess than stocks and bonds.

The Commission noted, “The financial transaction tax aims at taxing the 85% of financial transactions that take place between financial institutions. Citizens and businesses would not be taxed.” 

In short, this is taking the VAT to financial transactions.  The EC even says so itself.  The report noted, “The financial sector enjoys a tax advantage of approximately €18 billion per year because of VAT exemption on financial services. A new tax on the financial sector would ensure that financial institutions contribute to the cost of economic recovery and discourage risky and unproductive trading.”

We have said it before and will say it again.  This is nothing more than taxing incentive.  How will financial institutions trade when they know that they will be taxed even on trades that they lose money on?

Why citizens need to care about this is that if it does raise anywhere close to the desired amounts, what is to stop the lawmakers from deciding that every day citizens should get to participate in this tax as well?  That is not out of line.  If it moves, Europeans can figure a way to tax it.  Now they have figured out a way to tax incentive.

When the transactions between financial institutions dry up and when the banks and brokerages fire even more workers, the endgame will have seemed silly.  The banks of Europe are already under more pressure than they (and their shareholders) would want.  This is just one more gash into a bleeding patient.

Normally we would call this a strategy thought up by Mr. Dumas, but we worry that the lawmakers won’t truly get the pun.  This is an idea from “Mr. Dumba$$”…

Jon C. Ogg

We have gone as far in the past saying that Goldman Sachs Group Inc. (NYSE: GS) might consider making a play for E*TRADE.  That is just not realistic at all in today’s post-blowup financial world. After all, Goldman Sachs is a bank holding company that technically has no real banking operations for the public.  The time has come and gone for that to be a reality.  The other two contenders for making a play are Charles Schwab Corporation (NYSE: SCHW) and Morgan Stanley (NYSE: MS).  Realistically, Morgan Stanley might have a hard time getting approved by regulators to even consider making an acquisition after the financial mess.

One big problem in analyzing the valuation of any of these companies is that there are many legacy accounts that can skew calculated values if you just consider current or active accounts.  There is also the 80/20 rule in business that is probably a 90/10 rule in online brokerages… instead of 80% of the value being based upon 20% of total clients, it may be that 90% of the real value comes from only 10% of the clients.  We have tried to highlight the different calculations from to firm as a result of the reported variations from firm to firm.

E*TRADE Financial Corporation (NASDAQ: ETFC) was screened with a pre-earnings return on equity (ROE) of only about 1.6% and a forward price to earnings multiple of 15.8.  E*TRADE’s market cap was $3.45 billion after the shares recently closed at $15.64 against a 52-week range of $12.24 to $18.13.  The problem is that it just is not cheap.  The company now claims some 4.3 million customer accounts, which included 2.8 million brokerage accounts.  We continue to value these on a brokerage account basis today and its $3.8 billion market cap after today’s 6% gain to $16.64 give a per account value of close to $1,350.00 today.

TD AMERITRADE Holding Corporation (NASDAQ: AMTD) has a return of equity (ROE) of 15.2% and a forward price to earnings multiple of 15.  AMERITRADE’s market cap is $11.2 billion. The shares recently closed at $19.61.  The 52-week price range is $14.42 to $22.85.  TD AMERITRADE has just over 8.2 million total accounts but calls its total funded accounts as being 5.59 million.  If we just use the funded accounts we have a value implication of nearly $2,000.00 per account.

Charles Schwab Corp. (NYSE: SCHW) has a forward price to earnings multiple of 14.9.  Its market cap is $18.6 billion.  The shares recently closed at $15.44.  The 52-week price range is $12.51 to $19.63.  Schwab claims some 8.1 million client brokerage accounts, implying closer to a $2,200.00 per account value.

The iShares MSCI Emerging Markets Index (NYSE: EEM) aims to track the MSCI Emerging Markets Index, but it actually does not invest in every single index company. Nearly 60% of its near-$37 billion in assets is allocated to Asian equities. Latin American shares make up about 21% of assets, and almost 20% of its funds are invested in emerging Europe and Africa.  At last look, the EEM included 800 of the 912 index stocks.

Usually we see something close to 50,000 contracts or more in a day trade in the Put options.  Not today. In the July-2011 Put Options we have seen over 259,000 contracts trade and the open interest of the corresponding contracts is over 530,000 contracts.  The table below will show you what you need to know, and that was at a 12:10 PM EST time stamp.

Joe Kunkle of OptionsHawk.com noted to us today, “Big blocks of July puts traded in Emerging Markets (EEM) just after 10:15am, the $47, $43, and $42 strikes, mainly sellers, either to close or willing to be long.  Traders will sell puts at key support levels when volatility spikes, and since those blocks, volatility has been fading hard in the EEM.”  In short, this is not your normal volume spike.

The emerging market shares ETF is down 1.4% at $45.00 today, which is actually down a tad less than the broader US market.  The 52-week trading range is $36.76 to $50.43.  Many investors are looking back much farther now for past valuations and the peak in the EEM was close to $55.00 back in 2007 before the recession took control.

JON C. OGG

Buffett may be even more upbeat this year than last year and probably be 180 degrees better than he was in 2009.  Buffett will also have to again explain how Berkshire Hathaway’s book value changes have underperformed the S&P 500 Index during the rally… The 2010 gain was 13.0% at Berkshire versus 15.1% for the S&P 500, while the 2009 gain was 19.8% versus 26.5% for the S&P.  Maybe Buffett should just point out the obvious that Berkshire Hathaway looks more and more like the weighting of a bond index AND the S&P 500 Index rather than just the S&P 500…The bird in the hand is that Berkshire Hathaway book value was “only” down 9.6% in 2008 while the S&P 500 suffered a whopping loss of 37% and Berkshire Hathaway’s book value rose more than the S&P 500 Index in 2007, 2006, and even 2005.

As of today, we do not yet have the book value per share for the first quarter.  That book value per A-Share was $95,453.00 versus a share price of $120,450.00 at December 31 and versus $124,450.00 as of Tuesday’s closing bell price.  We expect the earnings release to come shortly before the annual meeting this weekend, so we’ll expect an updated book value.

Goldman Sachs Group Inc. (NYSE: GS) is a position that Buffett will not have to deal with now.  Last year his shareholders acted dumbfounded in silence when Buffett defended Lloyd Blankfein by saying he just wished that Blankfein had a twin brother he could hire.  Goldman Sachs has repaid that 10% preferred investment from late-2008, but by our count he still holds those warrants and will use them opportunistically.

General Electric Co. (NYSE: GE) has a longer lock-up period on being able to call away those 10% preferred shares bought in late-2008, and we would expect to hear Warren Buffett telegraph that he expects GE to call the shares away.

The one other big issue we will go ahead and get out of the way is the recent fiasco regarding the David Sokol departure.  He went from being considered by Wall Street as a potential Warren Buffett successor to an ‘insider-insiderless’ trading scandal overnight due to his personal stock trading ahead of and into the Lubrizol Corporation (NYSE: LZ) merger.  Our take, particularly after seeing the reaction from our own independent reader survey, is that this will simply go away… over 49% said it will only affect David Sokol and over 34% said that neither Sokol nor Berkshire will likely suffer any real damage.  The issue, though, is far from settled for now since a Berkshire Board Committee said that Sokol mislead Buffett and other top executives about his stock trading ahead of the Lubrizol deal.

Another portfolio change we expect to hear more about is the BNSF giant railroad acquisition.  This transformed the company, and Buffett has claimed on multiple occasions that this acquisition went far better than he expected.

Our take is that  Ajit Jain seems to be the favorite, if you trace sentiment internally, as Buffett was quoted in a prior annual letter: “If Charlie (Munger), I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.”  In the most recent annual report, Buffett was quoted as saying, “Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit.”

Buffett is also expected to highlight at least some updates to his quarterly holdings, although he is not bound to address anything more for another two and a half weeks when his quarterly filings are required to be made.  As of our latest report, the top holdings were The Coca-Cola Company (NYSE: KO), Wells Fargo & Co. (NYSE: WFC), American Express Company (NYSE: AXP), and Procter & Gamble (NYSE: PG).

At $50.00, it really is the Devil’s Metal.  For starters, $50.00 per ounce is going to be bad for you and bad for me.  This means that “real” inflation is in full swing rather than the fear of inflation.  The iShares Silver Trust (NYSE: SLV) hit a new high of $41.73 today and the ETFS Physical Silver Shares (NYSE: SIVR) hit a new high of $42.53 today.  For those using leverage, the ProShares Ultra Silver (NYSE: AGQ) also hit a new high of $287.25 versus a 2010 close-out price of $158.95.  It has been impossible to ignore that gold hit new recent highs as well and the SPDR Gold Shares (NYSE: GLD) peaked so far at $144.90, meaning that gold is flirting with $1500.00 per ounce.

Two more winners at $50.00 silver will be Silver Wheaton Corp. (NYSE: SLW) and Pan American Silver Corp. (NASDAQ: PAAS).  Silver Wheaton hit a high of $43.85 today and its 52-week trading range is $16.80 to $47.60. Pan American Silver hit a high so far today of $38.69 and its 52-week trading range is $22.21 to $43.06.

We are seeing $50.00 silver calls more and more now.  A basic news search will show $50 silver calls from The Market Oracle, GFMS, the WSJ, Resource Investor, Bloomberg and on and on.

A basic recap of why silver is better than gold is very simplified, but at least some food for thought from the mind of a simpleton. Admittedly, this is one-tenth of the driving force and is “stupefied” for simplicity… Gold is too small per unit and costs too much for poor people whether times are good or bad.  Silver is what can be used “at the street level” for buying food, water, and basic needs items.  If we have to use gold for those things, then it means there has been a global breakdown.  Silver also is easier to use for industries.

The big trick is here to interpret the Gold/Silver Ratio.  Trying to bet against this now may seem like throwing darts at a dart board when you know that someone is firing a machine gun in the general area.  Still, this gold/silver ratio is reaching what would be a generational extreme.  We track this at GoldPrice.org and what was extreme at 37 a week ago is now even lower at 35.3 per the charts.  This now broke the 1998 lows and we are now approaching extremes not seen since the early 1980s and this data goes back even further here.

Playing the gold/silver ratio is easy for retail investors who don’t want to make a directional bet on metals.  If you believe that silver will fall more than gold or that gold is now “undervalued” then (with equal dollar amounts in each) you can buy SPDR Gold Shares (NYSE: GLD) and short the iShares Silver Trust (NYSE: SLV).  That trade would have been an absolute widow-maker so far.

Lastly, getting exposure to the silver and gold market in a basic brokerage account can easily be done via stock options for the SLV and GLD trusts.  The cost to bet on $50.00 silver by January 2012 is currently about $2.60 per options contract.  That same $50.00 call bet for July 2011 expiration costs ‘only’ $0.80 per contract.  The bet going the other direction by the same amount is cheap in puts now as the trade has been so one-sided: the $34.00 PUTS for July 2011 are selling for about $0.65 today.

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JON C. OGG

Here is what traders and investors need to know about and care about.  There was a huge amount of concern that Henri Termeer would manage to drive Sanofi-Aventis away.  So arbitrage spreaders and investors who were sitting on great gains were buying PUTS to protect the position.  The open interest for the FEB-2011 was almost 190,000 contracts in the available PUTS alone.  The open interest in the CALLS was for FEB-2011 was about 100,000 contracts. On Monday, that open interest was reaching a record.

The MARCH-2011 CALLS had a larger open interest than the PUTS due to the time value and betting patterns of investors when it comes to M&A investing.  This might not matter as much as it would have if the merger would have hit a terminal snag, but it is what traders and investors need to know now.

If you want to know which other biotech outfits may be acquisition targets, we created a list of about 15 potential biotech M&A targets for BioHealthInvestor.com at the end of January.  Nothing has changed as far as that list is concerned.

JON C. OGG

As of 2:30 PM EST, we have seen over 18,000 of the nearest options contracts trade in the CALLS ($100 to $120 strikes) versus only about 6,500 of the nearest PUTS ($110 down to $90 strikes).

What is interesting on the CALL options is that the $115 and $120 CALLS for February have both traded over 7,000 contracts versus an open interest of 3,022 in the $115 strike and 3,366 of the $120 strikes.

This is much more likely tied to traders putting on new FEB-2011 options bets rather than any major reverse indicator due to last Friday having been options expiration date.  Many option rolls will have taken place late Friday, but there are always more which take place the week after options expiration date.  Still, a bet is a bet and seeing twice the open interest trade will catch many investors’ eyes as unusual options volume.

The drop of 3.6% to $106.00 is on almost double the normal volume as there have been some 5.8 million shares traded.

JON C. OGG