That sludge reminds me of the same looking stuff I use to see in the top of my valve covers when I ran the vacupan vent system from the header collectors to the valve cover breather caps. I ended up removing the rubber tubes to the header collectors and the sludge went away IHTHs, most of the blocks, heads or head gaskets I had cooling system leaks with got worst, not like yours Do you have a vacume pump fitting in the fuel pump block off plate? Does water get sprayed onto the timing cover between rounds when you cool it down The motor is talking to us, now if we can just figure out what it is saying Good luck, keep us in the loop