Thanks boys, I think you are onto something. I thinned it some more but got the same result. Then I realized I had some Alclad Laquer based primer which was prethinned, so I tried it. It when on nice and smooth.
The only other possibility is that is drying too quickly. The lacquer thinner I'm using says its medium drying. I will keep thinning it until I figure-out either its drying too quickly or because it too thick.