If you can't use "What U Hear" aka "Wave Out Mix", you either:
A) Need a better sound card.
B) Turn off Windows Blinds, if you are using Vista.
To apply an effect, you have to select part/all of the track you are editing, higlight some with the selection tool or press Ctrl+A to select everything.
Also, try lowering the recording volume... That, and try pressing the Stop button, (yellow square lol) THEN try recording/effect application.