this a 1958 model QD? If so, it does need one of those spacers, and from the looks of your picture, it is probably in place. Water is supposed to spill out of that hole, that is normal, but there shouldn’t be any exhaust or smoke coming out of there.
Yes the motor is a 1958. It has a newer gear foot. I bought it without the gear foot and found a good used one. It runs well, the water coming out does not have exhaust coming out with it.
thanks for the come back!
dale