More often than not, your headers will cause the water in the oil thing.
Couple questions.
Do you have steam/water to your headers at less than 1500 rpm?
Are you running a Bassett T valve with those headers?
If so, have you checked it lately?
Make sure it's clear of obstructions that could hold the ball open. Check to make sure the spring inside isn't broken, and when you reassemble it, spray a little WD-40 on the ball and inside the valve prior to putting it back together. Also the spring inside the valve has two different sized ends on it. Make sure the small end is the one the ball sits on. The ball should not fall inside the spring but be perched up on top of it.
Are you running a valve for the cooling water from the pump to the motor? What is your engine temp at idle and while cruising?
Have you ever had this problem before, or is it a recent development?
My take on the timing thing would be to check with the cam manufacturer to see what they recommend (if you know the grind # and cam maker).
Otherwise a pretty good rule of thumb would be 10 degrees BTDC static (idling at about 900 rpm)
Total would be around 34-36 BTDC when all the mechanical advance is in (3000 rpm or so).