Kid me: I lost my stick.
Teacher: No, you didn’t.
Kid me: How do you know that?
Teacher: It’s hanging out of your pants.
Listen up, dummy! The kid says he lost his "stick", but the teacher knows exactly where it is. It's a funny way of implying the kid's little buddy is standing tall. It's funny because the teacher points out the obvious in a suggestive manner, and you are too dumb to see it.