Thanks for the info. So why would the oil stop pushing out the muffler when i disconect the breather reed hose from the carb?
Your oil sump slash breather system is pretty cool. The breather is a ONE WAY, pressurized air OUT of the engine pipe to the air filter. The breather keeps a small vacuum on the oil sump limiting oil pooling at the rings. This help with oil consumption. Your oil dipstick tube should have an O-ring or gasket. This is to SEAL the tube to keep the vacuum IN the oil sump. The breather should have a small restriction to limit oil flow OUT of the breather tube into the air filter box. Probably some foam in there too to catch oil vapors and return to the sump.
I would check your dipstick tube for a proper gasket. Clean the threads off. Probably a ton of oil and grit around there.
Next I would check or replace your breather system all the way to the carb. You said this was an old engine. Might have an oil/grit/dirt plug in it some where causing it to not work.
Lastly did you end gap check and set your rings? Did you measure the bore before and after the hone job? Is your cylinder even round?
So if everything above it tip top, sounds like the rings didn't seat. Must have a ton of blow-by.
slomo