I've got a strange fluid coming out.....

Check to see if your lower unit lube looks the same, if it does you have a bad seal. The water issue may or may not be an issue, try and pinpoint where it is coming from.

Swamp

 

Between the engine cleaner and the 2 stroke oil I'd say what you're seeing is an emulsification
of unburned 2 stroke oil, cleaner and water that has been deposited on the inside of the
exhaust housing and is draining out after the engine has been turned off.
You don't see it when running the engine on the flush muffs.
You would see it floating on top if you ran in a bucket.

 

Water coming out of a higher spot on the motor when the muffs on can be normal depending on the motor.

As far as the grey stuff coming out, if it is a 4-stroke I'd be curious, if it is a 2-stroke and it happened just after you used an engine cleaner then it's most likely just carbon being cleaned out, mixed with left over oil, gas, and water could look like a grey sludge.

 

All 2 strokes smoke
The amount of smoke is in direct relation to the mix ratio.
At idle rpm's up to 40% of the fuel oil mix is discharged
out the exhaust, unburned. Hence the heavy smoke.
Note the blue coloration of the smoke, that's unburned oil.

 

I sometimes run a 20 Hp merc  I use XD 50 very little smoke

here is a Vid of a Frankenstein 8 Hp

I think It has a 9.9 power head ... I changed the Carb ... and advanced the timing

hardly any smoke   XD-50


http://www.youtube.com/watch?v=Sou_C8PTLlA&feature=channel

 

Additives can make a 2 "smoke" smoke even worse till the fuel is run though. Some make more smoke than others. When I only do a partial tank refill I tend to be a little more generous with the oil. If I do that a couple of trips in a row, I can get a bit of smoke. It goes away when I run the tank dry and replace with the right ratio. Doesn' take much extra oil to make a noticeable difference.