1. Ackshully, "cats ass" is mentioned in The American Thesaurus of Slang as an oil field term meaning a "kink in a wire cable". I've experience with kinks in cables, and "cats ass" turns out to be a much more polite term than the ones I've heard used!
2. A GOOGLE search turns up "cats ass" being used by a lot of young people describing something they like, or think is great. "That CD is the cats ass."
3. I suggest they are using a term from their grandparent's time: "cat's meow", but adding a vulgar spin... From the resources page, SAYINGS & EVERYDAY EXPRESSIONS has this to say about that: "CAT'S MEOW---A nifty idea, thing or person.---"She's the cat's meow."---"Cat's Pajamas" "Cat's Whiskers" Since the cat has the capability of looking enormously pleased, maybe the expression came from that appearance of satisfaction."
4. The inquirer below ("Today's Slang Words") who is going to write a column on the "funny things the young people are using nowadays to trip up the old crowd" might want to expose this bit of recycling.