EDMOND — “The beat goes on, the beat goes on. Drums keep pounding a rhythm to the brain. La de da de de, la de da de da.” Those lyrics from Sonny and Cher’s 1967 song might be a good description of the ongoing sovereign debt story in Europe and the wild stock market swings.

Market traders sometimes use the term “whipsawed” when describing what happens when you find yourself repeatedly losing money by being on the wrong side of a trade. When I was a rookie stockbroker in 1977 in the San Francisco area, one of my fellow traders was a Chinese man who went by the Americanized name Paul.

Paul was a great guy and very smart. But he sometimes hit a streak of bad luck with a series of losing trades. Paul also had a little trouble with American slang. One day he was looking particularly dejected and told me, “Bad day. Bad day. I just got whipchained.” I said, “Do you mean whipsawed?” He said, “Yeah, that.” Nobody could keep a straight face.

Whether you call it whipsawed or whipchained, lately a lot of investors have gotten up close and personal with the term. After a terrible August and September, the markets blew the roof off in October. The last week of October was quite incredible as there was an announcement of a new plan in the Eurozone to fix the sovereign debt crisis. Life was good again and there was a monster short covering rally. Those who were betting big on nothing happening got caught on the wrong side of the trade and lost billions trying to get out. One major trading firm, MF Global, already has gone bankrupt. Talk about getting whipchained!

Then there was the first week of November and things turned awful again. Down more than 500 points in two days! Maybe the grand plan was not so grand after all. Markets were stunned by the news that Greece was going to hold a public referendum vote on whether the government should accept the rescue plan its government officials supposedly agreed to. Seriously? Isn’t that like asking the public if they want to vote for a depression or just let one happen? Either way, they get the same thing.

There is an old banking joke that says, “If you owe the bank thousands (a small amount), then the bank owns you. If you owe the bank millions (a large amount), then you own the bank.” From what I see, Greece just told the rest of Europe, “It’s our debt, but it’s your problem.”

The markets went in the tank and all those who reversed their positions the previous week were suddenly on the wrong side of the trade again. It will be interesting to hear about all the margin calls that come out of this and all the big hedge fund redemption orders as their investors try to get out. I hate to say, “I told you so” but I can’t help myself. In my Sept. 24 newspaper column I said, “I think you are about to get whipsawed.”

One of the provisions of the Greek bailout plan was Greek bondholders would take a voluntary 50 percent “haircut” on their bonds. That means bondholders agree to write off 50 percent of the amount owed them. Not everyone agreed, however.

But that brings up an interesting problem. What happens to the Credit Default Swaps (CDS) written on those bonds? Remember AIG and those pesky little CDS’s they wrote on mortgage backed bonds that blew up? Without getting too technical, a CDS is basically an insurance contract that pays if the debt it is insuring defaults. For example, if I were an institution buying Greek bonds, I might buy a CDS (usually from an insurance company or bank) that would pay me the value of the bonds if they defaulted.

But what happens with this deal? Issuers of the CDS’s in this case are saying that since the default is less than 100 percent and is voluntary, it’s not really a default and the CDS issuer doesn’t have to pay. That would be like you having homeowner insurance and your house caught fire and partially burned down; but the insurance company says that since your house only partially burned down, it’s not really a loss and they won’t pay. I suspect we’ll keep a small army of lawyers fully employed for a long time arguing over this one. In the meantime, somebody lost a lot of money.

On top of that, if Greece gets a partial write-off, how long do you think it will be before other countries with serious debt problems want the same thing?  Think Italy, Spain, Portugal and Ireland for a starter list. Before this is over, Europe’s problems will visit shores all across the world.

Think about the impact of all this for a minute. If your bank offered to cut your mortgage and credit card debt in half, you would be pretty happy. But what if they told you that in exchange for that reduction you would be forced to sell many of your possessions, take a huge cut in pay, reduce your pension by half, have your car repossessed and give up most of your state benefits like health care and education? Oh, and on top of that inflation would eat up a lot of what’s left. Would you still be happy? Perhaps you might consider rioting in the streets also. Not that this isn’t all necessary, but it is definitely not going to be accepted easily.

While macroeconomic facts matter in the long run, in the short run we’re dealing with a volatile, news-driven market. Whenever Europe leaves the headlines, it soon will be replaced with headlines about what the so-called Super Committee is going to do. The fun never ends. Be careful, do your homework and don’t let emotions rule the way you invest. If not, you might get whipsawed, whipchained or just plain whipped. Thanks for reading.



NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com.  Securities offered through Securities Service Network Inc., member FINRA/SIPC.