I would think a less aggressive polish (try SIP) and orange pad would remove those water marks. If you aren't getting them out with compounding paste, I don't know what to say except I don't think you should have jumped to compounding paste right away.
Are you sure you burned out your 7424? Or maybe does it shut itself off for protection if it reaches a certain temperature?
To avoid getting water spots in the first place, wash in the shade and don't let water spot on the car. Or use a CR Spotless.