I lean toward the second possibility. Ed Kilgore over at NewDonkey gets it about right:
It’s bizarre, to say the least: at precisely the moment when the Bush-Cheney campaign has fully committed itself to an 18-day drive to demonize John Kerry as a Massachusetts Liberal, BC04 and its conservative media echo chamber are suddenly focused on a different L-word: Lesbian, as in the sexual orientation of Mary Cheney.
No, it doesn’t make a whole lot of sense unless you hypothesize that BC04 don’t quite know what to do and figure anything that generates a campaign story that isn’t about jobs, health care or Iraq is a net plus. But this kind of campaigning is a sign of weakness (see post below) not strength.
It’s probably also a sign they’re pretty worried the Kerry-is-a-Massachusetts-liberal strategy won’t work. And they should be.