Thanks for the follow-up guys, appreciate it. I am sure you get tired of the same noob questions constantly getting asked but its nice to see people still willing to help out where they can and not getting pissed having answered the same time 10 times.
When claying, contaminates get knocked loose and reside in the residue, which is why you should NEVER hand or machine polish right over the residue, or apply wax or sealant right over the residue. Machine polishing over the clay residue is the worst, since any contaminates in the residue get picked up in the pads and worked against the paint by the machine. Also, the clay residue clogs up the pads making them less effective and increasing the time required for polishing. And it does not matter that it has been done and people do it, it just does not make any sense. Even the time savings justification that it "skips a step not removing the residue" does not make sense, since the time lost to clogged-up pads far exceeds the minimal time it takes to remove the residue before polishing.
My preferred method of removing claying residue is by washing. I just make the claying step part of the washing process. After wasing and rinsing, when the paint is clean, I move straight to claying instead of drying. After claying, make another rinse to remove the residue, then dry before moving to the polishing step.