There is/was a poet in front of Kistandalius' shop. If you pay him to recite some poetry, the mage comes out to listen, and you have a very brief distraction to get into the back room and grab a spell book from the table and the dagger from the chest. Any attempt to enter his back room other than this will result in being teleported away, and eventually a drop in reputation.
I was using swords, so never looked at any dagger stats besides trade value.
