The red color in there is normal, i see that on most of them, its the grease and such put in there. As for the wiring, its not sealed up completely, there is a weep hole on the bottom, so any water that did get past that rubber grommet would just drain back out. I had one that just had the wires hanging out the hole without a grommet, was like that for years!! LOL
Sounds like you have a wiring/electrical gremlin. Best advice, go through every connection, every wire, on the whole thing.
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1984 Honda ATC200ES "Big Red"
1982 ATC200E "Hondie"
1988 TRX300FW "Project Quad" Still in progress....