I'm at a loss to help you diagnose your cold start problem. I don't believe it's O2 sensor related, as the O2 sensor only starts working after it's reached a high temperature - which would take some time even if it's electrically heated.

Fuel pressure / delivery may be something to check.

As far as the fluids go, I like Mobil 1 15W50. California would be a good place for this viscosity - I'd only go to a lower one if the temps got below zero - not too likely in California unless you're vacationing with the Donner party.

I wouldn't waste my $ on synthetic ATF - I don't believe that MB recommends it for this transmission. Drain, change filter, and ATF fill every 15k with MB recommended products should do you fine.

Also - make sure you drain your antifreeze every two years, and use the MB product to refill. All of my BMW and Mercedes mechanics tell me that this goes a long way towards preventing problems.

Good luck finding the cause of your problem - please share your remedy with us if you get it solved.

Troy
1995 E420 75k