I don't think "gender confusion" is an issue since the kid is pre-sexual. That said I don't think the mother should be painting a boy's toe nails pink. I think that says some things about her that are rather odd, and as the kid develops there might be problems, "gender confusion" being only one of them, since she's apparently a REALLY strange bird.
Whether this is genuine advertising, or staged for the fake contreversy, the bottom line is that the picture *IS* messed up, and the kids is being exploited by being shown in such a situation, having fun or not. I won't go so far as to say they should take the kid away from the parents who would do/allow this, but I definatly think there is enough here where child services should look into it, and keep this in mind if there are other incidents.
What this most makes me think of is how some women see their kids almost as living fashion accessories and dolls. Companies make a fortune over women who get off on dressing their kids up in wierd outfits, or having them do odd things to show off. It occurs to me that this is probably the kind of lady this whole business is aimed at. That said, such attitudes wind up being really unhealthy, especially if the mother doesn't want to let go when the kid starts to grow up. As I said, it's something that should be looked into by the authorities, but there is no way to say how much action (if any) should actually be taken going by the picture.