Talk to the man sitting on the floor. He wants a knife.
From the Christmas lights, take a RED BULB and use the chimney that appeared to climb down. Walk to the left and talk to Rudolph. Give him the red light bulb and receive some TEARS in return. Walk to the right and use the tears on the snow-cursors on the left.
The tears will melt the arrow and a KNIFE will appear. Pick it up and use the tower to climb back up the chimney. Put the knife in the stocking and Christmas can start.
Game source: A copy of the game was found here on the internet.