Originally Posted by grizz1

What is happening is normal - it is called "pinch".
The sleeve is slightly tapered at the top, to provide a good piston to sleeve seal. When the motor is new the piston is very tight in the sleeve at, or around TDC. As the motor wears in this "pinch" slowly wears away to where the piston is a nice snug fit, not as tight. This is what gives you your compression.
When turning the crank over without a flywheel on, it will be very hard to get the piston past TDC and back again because of the pinch. This means your motor is in good condition, and will have good compression and performance.
Re-assemble the motor and run it. It is fine by the sounds of it. Make sure you have the piston facing the right way - lower skirt to the rear, and the con rod in the right way - oil feed notch running the length of the rod should be facing the front (crank shaft), otherwise you will not get sufficient oil to the rod bushes.
Hope this makes sense.
You should only need to lube the carb needle O ring seals. Guys use all different things. Rubber grease should be OK. Get yourself some of the newer Nitrile O ring seals. These won't go hard and flakey, and they last forever.