State Street (NYSE: STT) is recently trading at $24.30 in pre-open trading, below its close of $36.35. STT reported Q4 EPS of 15 cents on net income of $65 million, compared to net income of $223 million, or 57 cents per share in Q4 2007. STT February option implied volatility is at 88, February is at 84; above its 26-week average of 73, according to Track Data, suggesting larger price movement.

Bank of New York (NYSE: BK) is recently trading at $21.39 in pre-open trading, below its close of $23.36. BK is expected to report Q4 EPS on January 22. BK February option implied volatility of 87 is above its 26-week average of 69, according to Track Data, suggesting larger price movement.

Northern Trust (NASDAQ: NTRS) is recently down $4.58 to $46.50 in pre-open trading. NTRS is expected to report Q4 EPS on January 21. NTRS option implied volatility of 99 is above its 26-week average of 71, according to Track Data, suggesting larger price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

MOST NOTEWORTHY: The Brokers and Asset Managers sector, Pacific Sunwear and Metabasis Therapeutics were today's noteworthy upgrades:

• Goldman upgraded the Brokers and Asset Management sector to Attractive from Neutral as they believe an inflection point has been reached for stocks with minimal credit exposure, or where exposure is marked to market. Goldman expects the problem to shift to regional banks and specialty finance from brokers. As such, Goldman upgraded American Express (NYSE: AXP), Metlife (NYSE: MET), Bank of New York Mellon (NYSE: BK), Franklin Resources (NYSE: BEN), Janus Capital (NYSE: JNS) and NYSE Euronext (NYSE: NYX) to Buy from Neutral.
  
• Wachovia upgraded Pacific Sunwear (NASDAQ: PSUN) to Outperform from Market Perform based on valuation, merchandising improvements, operating efficiencies, favorable product mix, and reductions in underperforming categories.
  
• Rodman & Renshaw raised Metabasis (NASDAQ: MBRX) to Outperform from Market Perform on valuation given the potential for MB07803.

OTHER UPGRADES:

• HSBC raised Novartis (NYSE: NVS) to Neutral from Underweight.
  
• UBS (NYSE: UBS) was upgraded at Morgan Stanley to Equal Weight from Underweight.

Bank of New York (NYSE: BK) is scheduled to report Q1 EPS on April 17.

BK has more than $23 trillion in assets under custody and administration and more than $1.1 trillion in assets under management.

BK call option volume of 5,199 contracts compares to put volume of 10,438 contracts. BK April option implied volatility of 56 is above its 26-week average of 38 according to Track Data, suggesting larger risk.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.

If you own a bank stock, you know how brutal the stock market can be. Many are down more than 50% as the subprime mortgage mess continues to shock all investors. But some banks are being punished for being a bank, not for mortgages they don't even own.

Not all banks are the same. Most banks make mortgage loans to several different kinds of buyers for different types of properties: existing homes, new construction, and/or commercial buildings. Or they only make loans to well-qualified buyers, ones with good income and high FICO scores (your credit score). Still others make no mortgages at all, have a diversified revenue stream and are only guilty of being called banks. Finally, there are banks that have a large percentage of their revenues from international lending. Smart investors will look for all of these types and start investing a small amount in several of them, then wait for the rally that will inevitably come.

MAJOR PAPERS:

• According to the Wall Street Journal's "Heard on the Street," as the economy continues to slow and the credit markets face further turmoil, high-profile companies like Countrywide Financial Corporation (NYSE: CFC) and The Home Depot Inc (NYSE: HD) are cutting back on buybacks as their shares drop.
• The New York Times reported that BlackRock Inc (NYSE: BLK) is expected to be the main asset manager for a $75B fund being created by Bank of America Corporation (NYSE: BAC), Citigroup Incorporated (NYSE: C), and JP Morgan Chase & Co (NYSE: JPM) to help stabilize the market fJor asset-backed securities, according to a source. The Bank of New York Mellon Corporation (NYSE: BK) is reportedly a leading contender to be a custodian of the fund.

OTHER PAPERS:

• A ruling in Vodafone Group Plc's (NYSE: VOD) favor may cause Apple Inc (NASDAQ: AAPL) to rethink its business model for the iPhone device. The injunction against Deutsche Telekom AG (NYSE: DT)'s T-Mobile unit may force Apple to "unlock" its iPhones, the UK Times reported.
• Struggling airline UAL Corporation (NASDAQ: UAUA), along with its unit United Airlines, is struggling, but finding a carrier willing to merge may be a problem, BusinessWeek speculated.

The Bank of New York Mellon Corporation (NYSE: BK) opened at $46.47. So far today the stock has hit a low of $45.49 and a high of $46.57. As of 11:15, BK is trading at $45.75, down $0.38 (-0.8%).

Following a strong surge over the past six weeks, the stock hit a new 52-week high yesterday at $46.93. The company announced earnings of 63 cents per share, just beating Wall Street expectations of 61 cents per share, but profit slipped a hair due to costs stemming from the company's purchase of Mellon Financial Corp. Recent technical indicators for the stock have been bullish and steady, while S&P gives BK a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a September bear-call credit spread above the $50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk and leverage returns. For this particular trade, we will make an 11.1% return in just 2 months as long as BK is below $50 at September expiration. BK would have to rise by 9% before we would start to lose money.

BK hasn't been above $50 at all this year but has been rising sharply recently. This trade could be risky if it turns out that the only reason earnings were down was due to the acquisition.

Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: At publication time, Brent neither owns nor controls positions in BK.

PepsiCo is scheduled to give its Q4 earnings review via live webcast on Thursday February 8, 2007. The PepsiCo website states that "the live webcast will be accessible through PepsiCo's website at http://www.pepsico.com, and will be archived for replay at the same website for a period of 14 days."

Based on estimates which PepsiCo, Inc. (NYSE:PEP) reaffirmed on October 20, 2006 in this press announcement, PepsiCo is expecting EPS of at least $3.31 prior to the effects of a completed tax settlement and a fourth quarter restructuring of manufacturing flow. PepsiCo states that core EPS should be at least $2.98. I'm expecting a penny or two more. The general consensus on investment blogs and message boards is that PepsiCo is doing well and will continue to do so. There's even some dialog about a stock split if PepsiCo reaches and holds $70 a share.

For third quarter 2006 PepsiCo had an impressive gain of 73% in EPS over the previous year but that was due in part to tax effects involved in the repatriation of cash in the year 2005. PepsiCo stated; "Excluding the impact of the prior year tax charge, EPS increased 12%.

An item of very significant interest is the fact that PepsiCo now offers a direct stock purchase plan via The Bank of New York. For as little as $260 you may now open an investment account and purchase PepsiCo shares. After your initial investment you may then add funds in increments as small as $50, and you may even set up your account for automatic monthly deposits. The fees associated with the Pepsico direct share purchase plan are almost non-existent. Review the purchase plan booklet I've linked to. I think you'll be pleased. They, with the assistance of Bank of New York, have made it very easy and inexpensive for you to become a share holder of the company. It's a situation which I myself plan to become involved with.

Playing into my declaration that water is a word for investors to watch for this year, PepsiCo will be pushing a new variation on its Aquafina brand. Aquafina Alive is a vitamin and flavor enhanced water which will be available in three flavor combinations.

Gary E. Sattler intends to take a position in Pepsico this year.

Also check out some other earnings reports that we're following, and let us know what you're expecting.

For the past two years I have been given 50 free (online) stock trades associated with my Wells Fargo & Co. (NYSE:WFC) Portfolio Management Account (PMA). I do not make anywhere near this many trades and do not expect to -- even in the next five years. So for me it makes all trading free. The PMA account has been convenient in many ways because it ties together my equity line, cash management, checking, credit cards, and stock accounts.

Recently, Bank of America Corp. (NYSE: BAC) has done the same thing and offered me 100 free trades. This seems to be the new direction in banking and relationship management. Telecommunications and cable networks are bundling services as well to increase revenue and make the relationship "stickier."

But as the banking services become similar, it's likely I will drop one bank for another and consolidate accounts further. This will likely happen a lot.

So who loses out? For me, in the short run it is likely to be Charles Schwab Corp. (NASDAQ:SCHW) because it still charges me for trading. Without the same network of branches as its competitors, it loses out on face-to-face contact as well. To mitigate this, I think Schwab will have to continue migrating its services toward asset management and banking and be forced to mimic the services of its competitors.

Mellon Bank / Mellon Financial Corp. (NYSE:MEL) (recently acquired by The Bank of New York Co., Inc. (NYSE:BK)) is also at a disadvantage (although it is not a retail bank and holds our business accounts only.) Mellon has been trying for years to increase the depth of our relationship, but for whatever reason has not elected to tie its services together and cannot compete with the full breadth of services offered by Wells and B of A. To its credit, however, Mellon has offered a high level of service for our many enterprises, and I doff my hat to Fred, Roger, Lynn, Janet, Tamara, Josh, German and Caesar in the Century City office. Without that valuable face-to-face relationship with them, we'd probably be gone.

All of the institutions we do business with offer what is referred to generally as "premier" banking. Each requires some level of account size or banking relationship to achieve a particular level of service. As competition heats up, this threshold will probably drop.

The price competition in stock trading and the consolidation of the industry has been, and will continue to be, forefront in the business news for years to come. E*Trade, Scott Trade, Fidelity and TD Ameritrade are all beating each other up with free trading offers, discounts to new clients, banking opportunities and more. You can find these amazing offers spread throughout the AOL Money and Finance pages and every other financial web outlet.

The very word "Bank" has become more and more obsolete, while "Financial Institution" becomes ever more relevant. For the consumer, the opportunities are expanding as the services and price competition keep increasing. Who do you "bank" with? Who do you "trade" with? Is there a better term than financial institution?

Check out my other posts for BloggingStocks here. and be sure and read You don't have to be 007 to find the best picks for 2007!

Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm.

Analysis provided by Joseph Lazzaro of Theflyonthewall.com:

Bigger isn't always better, but in the case of the Bank of New York's (NYSE: BK) purchase of Mellon (NYSE: MEL) for $16.5B, it almost certainly is.

The Bank of New York, which was founded in 1784 by U.S. Constitutional framer Alexander Hamilton, has long been a major player in asset management / asset servicing, and in treasury and clearing services. The Bank of New York will now add Mellon's asset management business and institution services, along with its cash management business, to become a major player in custodial services. The combined bank, which will be known as The Bank of New York Mellon Corp., will administer $16.6T for institutions, will have $1.1T in assets, and annual revenue of $12B.

As part of the deal, Bank of New York shareholders will receive 0.934 new shares for each BK share they hold, while Mellon shareholders will get one new share for each MEL share they own.

Further, each stock's price movement Monday indicated Wall Street's overall approval of the deal. Generally, after a deal is announced the acquiring company's stock drops, and the acquired company's stock rises. Not so with this deal: as of early Monday afternoon, both stocks had risen substantially - Mellon gained $2.50 to $42.55 and the Bank of New York surged $4.10 to $39.59.

Analysts say the deal should generate significant synergies that will reduce operating costs. The two companies said they expect to cut about 3,900 jobs from their current combined workforce of 40,000, lowering the combined entity's annual operating costs by about $700M, or by 8.5%. Restructuring charges will total about $805M.

Investment Analysis: The best way for the typical investor to play the BK/MEL deal? If your portfolio can tolerate moderate risk, consider adding shares of BK on a pull-back to near $39. However, as a result of the deal's positive reception, BK's shares may climb over $40 before you have a chance to buy. If BK rises over $40, let the stock close over $40 per share for a second day, and if it does, buy it at that time. If it doesn't close above $40, buy on a pullback to $39 or $38.

This morning, The Bank of New York Company (NYSE: BK) announced the $16.8 billion stock acquisition of Mellon Financial Corporation (NYSE: MEL). Combined, the companies will have about $12.5 billion of annual revenue, rank first worldwide with more than $16 trillion of assets under custody, and rank in the top 10 with more than $1.1 trillion of assets under management.

The BK/MEL deal makes sense because securities processing -- managing the paperwork and information flows between buyers and sellers of stocks and bonds and all the parties in between -- is a scale sensitive business. In other words, the bigger you are, the lower are your costs to process a transaction. And the lower your unit cost, the more leeway you have in price cutting to win lucrative contracts.

The stock market appears to like the deal -- BK is up 8.4% and MEL has risen 5% in pre-market trading. Usually the acquirer's stock drops on such announcements so this is an unusual vote of confidence.

This deal is likely to spur more such deals and State Street Corporation (NYSE: STT) and Northern Trust Corporation (NYSE: NTRS) are two of the most likely merger candidates. STT has $11.3 trillion in assets under custody -- $8 trillion more than NTRS's $3.3 trillion. STT could acquire NTRS since its $20 billion market capitalization is $8 billion more than NTRS's.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in Bank of New York, Mellon Financial, Northern Trust or State Street.

Stock futures were a little higher on a fair value basis early this morning, pointing to a similar start to stocks.

There are no economic data of note released today. Oil prices were lower as OPEC, worried about the weakening dollar, is leaning towards further production cuts. However, Hugo Chavez claimed reelection was widely expected.

What's really making headlines this morning, a story that's been developing over the weekend, is Pfizer, Inc. (NYSE:PFE). The world's largest drugmaker saw its shares sinking as much as 12% in Frankfurt after it had announced it would halt the development of a key new cholesterol treatment, torcetrapib, due to safety concerns and higher death rates in trials. On the NYSE, some analysts are predicting PFE shares, which have closed at $27.86 on Friday, would plunge to $20.

The other big news item today is the announcement that Bank of New York Co. (NYSE:BK) will merge with Mellon Financial Corp. (NYSE:MEL) creating the world's largest securities servicing and asset management firm -- Bank of New York Mellon Corp. -- with $16.6 trillion under custody. In the announced stock deal, Mellon will pay a premium of about 6.5% over Bank of New York shares, worth $28.4 billion.

In other corporate news:

Qualcomm Inc. (NASDAQ:QCOM) announced it is buying two micro-chip businesses to boost its core wireless technology product offerings. While the deals, to close in December, would be dilutive in 2007, they should be slightly accretive in 2008. Qualcomm is buying the majority of microchip maker RF Micro Devices Inc.'s (NASDAQ:RFMD) Bluetooth assets for $39 million and paying an undisclosed amount of cash to buy privately-owned startup Airgo Networks Inc.

LSI Logic Corp. (NYSE:LSI) announced it will purchase competitor Agere Systems Inc. (NYSE:AGR) for $4 billion in all stock deal.

Finally, on Friday after the bell, Bank of America Corp. (NYSE:BAC) surprisingly announced that Chief Financial Officer Al G. de Molina will resign at the end of the year after only 15 months in the position. He will be succeeded by executive Joe Price.